general mills continuing growth

Transcription

1 2007 annual report general mills continuing growth

2 contents 2 Letter to Shareholders 6 Growth Drivers 18 Corporate Citizenship 20 Corporate Directory 22 Selected Financial Information 25 Financial Review Back Cover: Shareholder Information General Mills at a Glance Net Sales by Division $8.5 billion in total 23% Big G Cereals 22% Meals 19% Pillsbury USA 14% Yoplait 13% Snacks 8% Baking Products 1% Small Planet Foods Net Sales by Region $2.1 billion in total 36% Europe 29% Canada 22% Asia/Pacific 13% Latin America Net Sales by Customer Segment $1.8 billion in total 48% Distributors/ Restaurants 42% Bakery Channels 10% Convenience Stores/ Vending Net Sales by Joint Venture (not consolidated) $1.0 billion proportionate share 81% Cereal Partners Worldwide (CPW) 17% Häagen-Dazs 2% 8th Continent u.s. retail Our U.S. Retail business segment includes the major marketing divisions listed to the left. We market our products in a variety of domestic retail outlets including traditional grocery stores, natural food chains, mass merchandisers and membership stores. This segment accounts for 68 percent of total company sales. international We market our products in more than 100 countries outside the United States. Our largest international brands are Häagen- Dazs ice cream, Green Giant vegetables and Old El Paso Mexican foods. This business segment accounts for 17 percent of total company sales. bakeries and foodservice We customize packaging of our retail products and market them to convenience stores and foodservice outlets such as schools, restaurants and hotels. We sell baking mixes and frozen dough-based products to super market, retail and wholesale bakeries. We also sell branded food products to foodservice operators, wholesale distributors and bakeries. This segment accounts for 15 percent of total company sales. joint ventures We are partners in several joint ventures. Cereal Partners Worldwide is our 50/50 joint venture with Nestlé and markets breakfast cereals in 130 countries around the globe. We participate in several Häagen-Dazs joint ventures, the largest of which is in Japan. And we are partners with DuPont in 8th Continent, which produces soy beverages in the United States.

3 2007 Financial Highlights Fiscal Year Ended In Millions, Except per Share Data May 27, 2007 May 28, 2006 Change Net Sales $12,442 $11, % Segment Operating Profit 2,260 2, Net Earnings 1,144 1, Diluted Earnings per Share Average Diluted Shares Outstanding Dividends per Share $ 1.44 $ Net Sales (dollars in millions) 10,544 11,122 11,308 11,712 12,442 Segment Operating Profit * (dollars in millions) 1,995 2,053 2,016 2,111 2, Diluted Earnings per Share (dollars) Return on Average Total Capital * (percent) ** ** * See page 47 for discussion of these non-gaap measures. ** Results include $197 million net gain after tax from divestitures and debt repurchase costs.

4 2 Letter to Shareholders To Our shareholders we re pleased to report that general mills had a good year in fiscal sales and earnings growth exceeded our targets, and these results fueled a strong return to shareholders. Net sales for the year ended May 27, 2007, grew 6 percent to reach $12.4 billion, and our unit volume increased 4 percent. Performance was strong across our business portfolio. As shown in the table below, every one of General Mills major operating divisions posted a sales increase, including doubledigit gains for Snacks, International and the Small Planet Foods organic division Net Sales Operating Division / Segment % Change Big G Cereals + 2 Pillsbury USA + 3 Baking Products + 3 Meals + 5 Bakeries and Foodservice Segment + 5 Yoplait + 6 Snacks + 10 International Segment + 16 Small Planet Foods + 21 Total General Mills + 6 Segment operating profits grew 7 percent to nearly $2.3 billion. This operating performance was noteworthy because our input costs, particularly ingredients, were up significantly. In addition, we increased our spending on advertising and other consumer-focused marketing initiatives by 8 percent ahead of the rate of sales growth. Productivity initiatives, strong plant performance and pricing combined to offset these increased expenses. As a result, our segment operating profit margin improved to 18.2 percent of sales. Earnings per share (EPS) grew 10 percent to reach $3.18. This was above our 2007 guidance and above our long-term growth target, which calls for high single-digit growth in EPS. We coupled this sales and earnings growth with an increased return on invested capital. We have a goal of improving our return on average total capital (ROC) by 50 basis points per year. We beat that target in 2007, as ROC increased 60 basis points to 11.1 percent. Cash dividends paid to General Mills shareholders grew 7.5 percent in 2007 to $1.44 per share. The market price for GIS shares increased 16 percent in 2007 and total return to shareholders, including dividends, exceeded 19 percent. strong fundamentals We believe our 2007 results and current momentum are the result of good execution on top of strong fundamentals. The fundamentals begin with our business portfolio. Consumers

5 2007 Annual Report 3 Price Appreciation (year-end closing stock price) Dividends per Share Total Shareholder Return (price appreciation plus reinvested dividends) $51.79 $49.68 $60.15 $1.24 $1.34 $ % 10.7% 7.2% today want food choices that offer great taste and convenience, along with health and wellness benefits. That makes categories like ready-to-eat cereal, ready-to-serve soup, frozen vegetables, yogurt, grain snacks and organic foods advantaged places to compete. And our brands hold leading positions in these on-trend, in-demand categories. We re increasing sales and market share for our brands all around the world. For example, our largest global business ready-to-eat cereals grew in nearly every channel and major geography where we compete, as shown in the table below. If you include our 50 percent share of sales from Cereal Partners Worldwide, the joint venture with Nestlé, our worldwide cereal sales exceed $3 billion today Net Sales Cereal Business % Growth Big G cereals + 2 Cascadian Farm organic cereals + 53 Foodservice cereals 2 Canada cereals + 6 Cereal Partners Worldwide + 18 Worldwide Cereal Net Sales + 6 Our wholly owned businesses are organized in three operating segments. In 2007, net sales for the U.S. Retail segment grew 4 percent to nearly $8.5 billion, and segment operating profits rose 5 percent to reach nearly $1.9 billion. International segment net sales grew 16 percent to exceed $2.1 billion, and operating profits increased 11 percent to $216 million. Bakeries and Foodservice net sales grew 5 percent to exceed $1.8 billion, and operating profits rose 28 percent to $148 million. Joint venture earnings, which are reported on a separate line of our income statement, grew 6 percent to reach $73 million after tax. continuing growth Two years ago, we adopted a long-term growth model that calls for low single-digit compound growth in net sales, mid single-digit compound growth in segment operating profits, and high single-digit compound growth in earnings per share. We believe that this financial performance, coupled with an attractive dividend yield, should result in superior returns to our shareholders. We see five key drivers of our business growth: product innovation, channel expansion, international expansion, margin expansion and brand-building investment. Our product innovation efforts focus on offering foods that taste great, are quick to prepare, and fit with consumers

6 4 Letter to Shareholders our broad product portfolio drove solid sales growth in increasing interest in health and wellness. Taste comes first, because history shows that consumers won t eat foods no matter how healthy or convenient that don t taste good. We ask consumers to regularly taste-test our products, head-to-head with competitive offerings. Our goal is to have at least 60 percent of consumers prefer our product. If they don t, we go to work on improving our brand. In 2007, 60 percent of our major U.S. Retail products met or exceeded this ambitious standard for consumer preference. At the same time, we re improving the nutrition profile of our products by reducing fat, sodium or sugar, and adding ingredients such as fiber, whole grains and calcium. Since 2004, we have improved the nutritional attributes for products representing 30 percent of our U.S. Retail business, and our goal is to increase that to 40 percent by the end of this decade. We re focused on creating products that attract new consumers to our brands or extend our brands to new usage occasions. For example, we estimate that 50 percent of sales for the lower-sodium Progresso soups we introduced in 2007 came from consumers who weren t previously buying Progresso. And Hamburger Helper isn t just for family dinners anymore our new Microwave Singles varieties make a great lunch or dinner for one. We estimate that 70 percent of 2007 sales for this line came from new users. Successes like these increase our sales and expand our product categories. Channel expansion, beyond traditional grocery stores, is a key growth opportunity for our leading brands. In 2007, we generated double-digit volume gains in retail channels such as supercenters, drug and discount stores, and convenience stores. In addition, we are a major player in the foodservice industry with sales to schools, hotel operators, bakeries, restaurants and health care facilities. We see significant growth opportunities ahead in these channels. We are generating strong international sales and profit growth for our brands. Today, we have 25 plants, more than 10,000 talented people and more than $2.1 billion in sales outside the United States. That s without including our share of international joint venture sales, which would add another $1 billion to the total. And we re just getting started, in terms of building our business around the world. We expect international expansion to be a key driver of sales and profit increases for us in the years ahead. Opportunities for margin expansion are the subject of increased focus companywide. We are eliminating slowerturning or lower-margin items, launching higher-margin

7 2007 Annual Report 5 Steve Sanger Ken Powell new items, simplifying ingredients and streamlining manufacturing steps to improve our sales mix and eliminate unnecessary costs. These efforts will help us offset continued commodity cost pressure and generate funds that we can reinvest in consumer marketing to fuel continued volume and sales growth. We believe that brand-building investment, particularly in advertising and newer consumer marketing vehicles, is a vitally important driver of growth for our businesses. This spending drives consumer awareness and trial for our brands, and it supports growth in sales at everyday prices, rather than at promotional discounts. In 2007, we increased our consumer marketing investment by 8 percent, and we have plans to raise our investment level again in General Mills most powerful growth driver is our people. We have more than 28,500 brand champions around the world, and their collective innovation and execution generated great results in market positions. We look forward to reporting our progress to you, and we thank you for your ownership interest in General Mills. Stephen W. Sanger chairman of the board and chief executive officer Kendall J. Powell president and chief operating officer july 27, 2007 We re excited about the prospects we see for continuing growth in fiscal 2008 and beyond. We re building on a strong foundation of on-trend food categories where our brands hold leading

8 6 our portfolio is a strategic advantage. consumers today want foods that offer great taste, convenience and, whenever possible, health and wellness benefits. our major food categories are a great fit with these consumer needs. We generate 40 percent of our worldwide sales from food categories that are inherently nutritious ready-to-eat cereals, yogurt, vegetables, organic foods and soy beverages. Other key businesses such as ready-to-serve soup and granola bars are convenient, better-for-you choices for a quick meal or snack. Helper dinner mixes in the U.S., Old El Paso Mexican foods in Europe and Wanchai Ferry frozen dumplings in China are time-saving meal solutions for busy families. Our food categories are growth categories, and that makes our business portfolio a real strategic advantage. General Mills Fiscal 2007 Worldwide Net Sales of $13.4 Billion* 13% Better-for-you Choices Ready-to-serve Soup Snacks 40% Inherently Nutritious Foods Ready-to-eat Cereal Yogurt Vegetables Organic Foods Soy Beverages * Includes $1 billion proportionate share of joint venture net sales. 47% Quick and Convenient Options Refrigerated Dough Dinner Mixes Dessert Mixes Mexican Products Super-premium Ice Cream Frozen Pizza and Snacks

9 7 U.S. Retail Leading Market Positions Fiscal 2007 Dollar Share % Rank Dry Dinners 76 1 Refrigerated Dough 70 1 Fruit Snacks 51 1 Dessert Mixes 41 1 Refrigerated Yogurt 36 2 Ready-to-serve Soup 31 2 Ready-to-eat Cereals 30 2 Frozen Hot Snacks 26 2 Microwave Popcorn 24 2 Granola Bars/Grain Snacks 24 2 Frozen Vegetables 20 2 Mexican Products 19 2 ACNielsen measured outlets leading market positions in attractive categories Our brands hold leading positions in markets around the globe. In the United States, we hold the No. 1 or No. 2 share position in a wide variety of shelf-stable, refrigerated and frozen food categories. Industry Sales U.S. Food Eaten Away from Home (dollars in billions) growing business in outlets for food eaten away from home U.S. industry sales for food eaten away from home now exceed $500 billion annually. We see tremendous opportunities for our brands everywhere from school lunchrooms to hotel menus to nursing home cafeterias Calendar Years USDA, Economic Research Service International Net Sales (dollars in millions) profitable growth in international markets Our Share of CPW and Häagen-Dazs Joint Ventures* Wholly Owned Businesses 2,322 2,584 2,710 3,109 Nutritious and convenient foods are in demand with consumers the world over. We re generating strong sales and profit growth for our brands in developed markets, such as Europe and Australia, and in emerging markets, such as Russia and China. 1, * Not consolidated.

10 8 Continuing Growth HEALTHY INNOVATION in just three years,we ve improved the nutritional profile of 30 percent of our U.S. Retail products. Consumers are increasingly looking for foods that provide health and wellness benefits. We re improving the health profile of many of our existing product lines and developing new products with strong nutrition credentials. Today, all of our Big G cereals contain whole grains, which can help protect against heart disease, some cancers and potentially diabetes. Cheerios has always been made with whole-grain oats, and is clinically proven to help lower cholesterol as part of a low-fat diet. In 2007, we introduced whole-grain Fruity Cheerios with 25 percent less sugar than the leading fruit- flavored cereal. We re now launching Cheerios Crunch Oat Clusters cereal with five whole grains. In total, the Cheerios franchise accounted for 12 percent of ready-to-eat cereal category sales in fiscal 2007, making it the best-selling cereal brand in the U.S. All of our Yoplait yogurt products are a good or excellent source a healthy mix of vegetables New all-natural vegetable blends from Green Giant are designed to meet specific health goals. For example, our Immunity Boost blend contains broccoli, carrots and sweet peppers, a combination rich in antioxidants. The Healthy Vision blend is a vitamin A-rich mix of carrots, zucchini and green beans.

11 2007 Annual Report 9 U.S Retail Products Improved (percent) Cheerios Franchise Market Share (percent of category sales) Goal SAMI, ACNielsen measured outlets of calcium, and retail sales in measured outlets alone topped $1.1 billion in We improved our Yoplait Kids line by adding omega-3 DHA, which helps support brain development in children aged 5 and under. This summer, we re launching Yo-Plus synbiotic yogurt. It contains probiotic cultures and fiber that work together to help regulate digestive health. Green Giant is a leader in the $2.5 billion U.S. frozen vegetable category. In 2007, we attracted new consumers to this business with products such as Just for One! single servings and Simply Steam vegetables. Our new Green Giant healthy blends are designed to meet specific needs such as boosting immunity or maintaining healthy vision. Health improvements have driven growth on many of our best-selling brands, and we re just getting started. Our goal is to improve 40 percent of our U.S. Retail portfolio between 2004 and tasty ways to add fiber Retail sales for the Fiber One cereal franchise grew 15 percent in 2007 due in part to the addition of Fiber One Raisin Bran Clusters. New Fiber One bars were introduced in January. In their first five months, they generated $28 million in retail sales.

12 10 Continuing Growth WEIGHT MANAGEMENT OPTIONS we have more than 100 products in our u.s. retail line with 100 calories or less per serving. Yoplait yogurt is a leader in the $4 billion U.S. refrigerated yogurt category. We posted good sales growth in 2007 with a variety of yogurt products that appeal to both kids and adults. And we have more innovation coming from Yoplait in Studies show that a clear majority of U.S. consumers make food choices to help maintain a healthy lifestyle. Weight management is a key concern for many people, too. Some of our fastest-growing product lines help people count calories without sacrificing taste. Retail sales for Yoplait Light yogurt grew 20 percent in fiscal 2007 due in part to a strong advertising message that this yogurt tastes great and has 100 calories per serving. Retail sales for Yoplait Kids yogurt grew more than 40 percent in This low-fat yogurt has 25 percent less sugar than the average of leading kids yogurts. Progresso readyto-serve soup has 32 varieties containing 100 calories or less per serving. This news contributed to 10 percent retail sales growth across the Progresso line in In 2008, we are introducing a new line of Progresso Light soups with just 60 calosoup s on Progresso soup continues to gain share in the $1.9 billion U.S. ready-to-serve soup category. Last fall, we introduced varieties containing 45 to 50 percent less sodium than regular soups. This year, we re launching Progresso Light, which has a zero POINTS value per serving, along with the endorsement of Weight Watchers.

13 2007 Annual Report 11 Progresso Soup Retail Sales (percent growth) U.S. Yogurt Category Segments (percent of sales) ACNielsen measured outlets plus Wal-Mart 36% Adult Cup Regular 24% Adult Cup Light 12% Kid 12% Natural/Organic 8% Adult Beverage 8% Adult Probiotic ACNielsen measured outlets ries per serving. In 2007, we partnered with Bob Greene, a well-known personal trainer, on the launch of his Best Life Diet book. This book mentions a variety of our products. We also created Best Life Diet merchandising events in many grocery stores, driving good sales growth for our participating brands. Watching your portion size is another way to keep your calorie count in check. Our 100-calorie packs of Pop Secret microwave popcorn continue to be a hit, and new Homestyle flavor is now arriving in stores. We also have introduced Chex snacks in 100-calorie packs, which helped drive 6 percent retail sales growth for our salty snacks in fiscal And we recently launched Fruit Roll-Ups Minis, with just 40 calories per serving. We ll have more great-tasting, lowcalorie products coming in a new workout partner We re partnering with Curves, a chain of 10,000 worldwide fitness centers for women, to launch a new line of cereals and snack bars. The cereals range from 100 to 190 calories per serving and contain whole grains and fiber. The 100-calorie bars contain 5 grams of fiber and are a good source of calcium.

14 12 Continuing Growth Grain Snacks Retail Sales (dollars in millions) Dry Dinner Mixes Market Share (percent of category sales) ACNielsen measured outlets plus Wal-Mart ACNielsen measured outlets Time-strapped consumers are buying more of our convenient, easy-to-prepare products. Today, 98 percent of all U.S. households have at least one General Mills product in their kitchen. Pillsbury is the clear leader in the $1.7 billion refrigerated dough market a category built on convenience. Retail sales for our cinnamon rolls and crescent rolls each grew by double digits in We re bringing more innovation to these lines in 2008 with Place n Bake Crescent Rounds and Flaky Cinnamon Twists. Retail sales for Totino s Pizza Rolls grew 8 percent in 2007 driven by Mega Pizza Rolls. Teens and moms like the easy preparation of this line of frozen snacks they re ready after less than two minutes in the microwave. Hamburger Helper has always been a convenient choice for dinner. Now it makes a quick lunch or snack with homemade taste made easier Pillsbury refrigerated dough products posted good sales growth in 2007, as we increased advertising on this easy-to-prepare line. New Pillsbury Simply Bake bars come packaged in an oven-ready pan, ready to bake and serve.

15 2007 Annual Report 13 CONVENIENCE COUNTS we have more than 400 products that can be made in 15 minutes or less, and even more are ready to eat. Hamburger Helper Microwave Singles. Each pouch contains all of the ingredients of regular Hamburger Helper and includes the meat. These new varieties drove 5 percent retail sales growth and a 3-point dollar share gain for our dinner mixes in We ve got more Helper flavors coming in For a warm, gooey dessert ready in less than two minutes, try Betty Crocker Warm Delights. Retail sales for these single-serving, microwaveable desserts exceeded $45 million in Convenient, greattasting and good-for-you is the ultimate food combination and that s Nature Valley granola bars. Retail sales for our grain snacks grew 24 percent on the success of our newest varieties, including two new flavors of Nature Valley Sweet & Salty Nut granola bars and Fiber One bars. We ve got more innovation coming in 2008 on many of these convenient product lines. Nature Valley granola bars have been a hit with consumers since their introduction in We ve added new varieties to the line, driving 21 percent compound sales growth over the most recent two years. Roasted Nut Crunch bars are our latest addition to this wholesome brand. microwave convenience For a warm, satisfying dessert that won t blow your diet, try new Betty Crocker Warm Delights Minis. They contain just 150 calories per serving. Hamburger Helper Microwave Singles are ready in six minutes in the microwave perfect for an after-school snack.

16 14 Continuing Growth A WORLD OF OPPORTUNITY our businesses generate $3 billion of international sales in more than 100 markets. International sales for Häagen- Dazs super-premium ice cream have grown at an 8 percent compound rate over the past four years. Net sales for our international businesses, including our proportionate share of sales from joint ventures, totaled $3 billion in We see tremendous opportunities for our brands in global markets. Cereal Partners Worldwide, our joint venture with Nestlé, generates $1.6 billion in annual net sales today. We have a 50 percent stake in this growing business, which holds an estimated 24 percent share of category sales in the combined 130 markets where we compete. Sales for our wholly owned international businesses grew 16 percent in We re focusing on three product platforms: super-premium ice cream, world cuisine and healthy snacking. Häagen-Dazs ice cream today is marketed in more than 60 countries around the globe. We re expanding this brand by introducing new flavors and products. And we re opening more Häagen-Dazs cereal growth around the world Countries outside of North America now account for more than half of the world s cereal consumption, and per capita levels are still low, so there s lots of room for growth. Cereal Partners Worldwide holds the No. 2 share position in these global markets.

17 2007 Annual Report Net Sales Growth by Region (percent) Canada Asia/ Pacific Europe Latin America cafes in Europe and China. Consumer interest in ethnic foods is growing around the world. Our Old El Paso Mexican foods are available in more than 20 countries. We have a variety of new items coming in 2008, including Stand n Stuff tacos in Europe and Crispy Chicken tacos in Australia. The Wanchai Ferry brand is a great frozen dumpling business for us in China, where sales increased 17 percent in We brought this brand to France in 2007, launching a line of shelf-stable Chinese dinner kits. For a healthy, wholesome snack, consumers around the world are grabbing a Nature Valley granola bar. This brand is available in 54 countries and counting. We ll bring these bars to new European and Latin American markets in growing world cuisine International sales for Old El Paso Mexican foods have grown at an 8 percent compound rate over the past four years. Wanchai Ferry has been a popular brand of dumplings in China. Now it s a global brand with Chinese dinner kits available in France and the U.S.

18 16 Continuing Growth Industry Food Sales Growth by Retail Outlet (three-year compound growth through December 2006) Grocery Stores Convenience Stores Club Stores Management Ventures, Inc. Drug and Dollar Stores Mass Merchandisers and Supercenters Natural and Organic Stores U.S. consumers are eating more food away from home than ever before. Our Bakeries and Foodservice segment is building our sales in growing foodservice outlets. We ve got a good business in schools with products like cereal and yogurt. Now we re developing a portfolio of healthy snacks, such as Fruity Cheerios cereal bars and Cinnamon Toast Crisps, that meet the nutritional requirements of K 12 school programs. In 2008, we re increasing our focus on hotels and health care facilities, two segments with great opportunities for future growth. A number of our products are well-suited for grab-and-go consumers visiting convenience stores. Our sales in these stores grew 12 percent in 2007, outpacing food sales growth in the channel. Hot prepared foods are a fast-growing category in convenience stores. This fall, we ll launch Totino s Pizza Rolls growing organic brands Cascadian Farm and Muir Glen are leading brands in natural and organic food stores, posting 21 percent net sales growth in This summer, we re adding new flavors to our line of Muir Glen soups and Cascadian Farm granola bars. We also are launching new Cascadian Farm Purely Steam frozen vegetables.

19 2007 Annual Report 17 OUTLETS FOR GROWTH fast-growing retail formats and the $500 billion u.s. foodservice industry are growth channels for our brands. and a new Pillsbury Sweet Minis line of cookies, brownies and mini-doughnuts, designed to be purchased warm from heated display cases. We re building our business in faster-growing retail channels, such as club, dollar, and natural and organic stores, with products for their unique formats. For example, in club stores, Pillsbury is launching a line of large-sized, frozen pizza snacks under the Pappalo s name. Larger packages of Pillsbury crescent and cinnamon rolls also will be in club stores this fall. And we re introducing gourmet frozen vegetables under both the Betty Crocker and Green Giant brands. We had strong growth in natural and organic stores in 2007 as we introduced a variety of new products, including Cascadian Farm Vanilla Almond cereal and several new soups from Muir Glen. We ve got more new items coming in Pillsbury Place & Bake muffins from our Bakeries and Foodservice division give foodservice operators an easy way to make a wide variety of muffin products. In 2008, we re expanding this successful line to include cookies, scones and cinnamon rolls. snacks on the go Caramel Bugles is one of our fastest-selling snacks in convenience stores, where industry food sales are growing at an 8 percent rate. New products for this channel include Hot n Spicy Chex Mix and Pillsbury Sweet Minis baked goods.

20 18 Corporate Citizenship The General Mills Foundation awards grants in the areas of youth nutrition and fitness, education, social services, and the arts. We provide product donations to food banks. And we make corporate donations through various programs that support specific causes that matter to our consumers General Mills Contributions (in millions) $20 Foundation Grants $21 Product Donations $41 Corporate Contributions In addition to providing high-quality products for consumers and generating good returns for shareholders, we also are committed to making a positive contribution to our communities and society as a whole. We do this in a variety of ways. For example, our Box Tops for Education coupon redemption program has been providing funds for K 8 schools over the past 10 years. Through our Save Lids to Save Lives program, Yoplait yogurt has donated more than $18 million to breast cancer research. And our Spoonfuls of Stories initiative promotes literacy. In the last five years, we ve distributed more than 25 million books in packages of Cheerios cereal. Through the General Mills Foundation, we provide grants targeting youth nutrition and fitness, education, social services, and arts and culture. In 2007, those grants exceeded $20 million. We made product donations valued at $21 million to America s Second Harvest, the nation s largest network of food banks. In addition, reporting on our efforts Our 2007 Corporate Social Responsibility Report describes many aspects of our corporate citizenship initiatives. It is available on our Web site at

21 2007 Annual Report 19 MAKING A POSITIVE IMPACT as a leading consumer company, we hold ourselves to high standards of corporate citizenship. 78 percent of General Mills U.S. employees volunteer their time for a variety of community service efforts. In 2008, we will increase our international efforts, focusing on improving nutrition, fitness and education for children. We re aiding in hunger relief in Africa by providing meals to feed 3,000 children in Malawi. And we re working with our international businesses to identify other opportunities to make a difference globally. We also are committed to maintaining and sustaining a healthy environment. We continually look for ways to conserve resources, reduce energy usage and minimize packaging. We ve set goals to reduce our water usage rate by 5 percent from 2006 to 2011, and reduce energy usage, greenhouse gas emissions and solid waste generation rates by 15 percent from 2005 to For more information on these and other aspects of our corporate citizenship, see our 2007 Corporate Social Responsibility Report. Our Box Tops for Education program is 10 years old. In the last decade, we ve donated more than $220 million to 90,000 K 8 schools in the United States. champions for healthy kids Since 2002, the General Mills Foundation has invested nearly $11 million through its Champions for Healthy Kids SM grants and other nutrition and fitness initiatives. These efforts support youth nutrition and fitness programs that promote a healthy lifestyle and have reached more than two million children across the country.

22 20 Corporate Directory Board of Directors paul danos Dean, Tuck School of Business and Laurence F. Whittemore Professor of Business Administration, Dartmouth College (1,5) Hanover, New Hampshire william t. esrey Chairman Emeritus, Sprint Corporation (telecommunication systems) (1,3*) Vail, Colorado raymond v. gilmartin Professor of Management Practice, Harvard Business School; Retired Chairman, President and Chief Executive Officer, Merck & Company, Inc. (pharmaceuticals) (2,4*) Woodcliff Lake, New Jersey judith richards hope Distinguished Visitor from Practice, Georgetown University Law Center (1*,5) Washington, D.C. heidi g. miller Executive Vice President and chief executive officer, Treasury & Security Services, J.P. Morgan Chase & Co. (2,3) New York, New York hilda ochoabrillembourg Founder, President and Chief Executive Officer, Strategic Investment Group (investment management) (3,5) Arlington, Virginia steve odland Chairman and Chief Executive Officer, Office Depot, Inc. (office products retailer) (3,4) Delray Beach, Florida kendall j. powell President and Chief Operating Officer, General Mills, Inc. michael d. rose Chairman of the Board, First Horizon National Corporation (banking and financial services) (2*,4) Memphis, Tennessee robert l. ryan Retired Senior Vice President and Chief Financial Officer, Medtronic, Inc. (medical technology) (1,3) Minneapolis, Minnesota stephen w. sanger Chairman of the Board and Chief Executive Officer, General Mills, Inc. a. michael spence Partner, Oak Hill Investment Management Partners; Professor Emeritus and Former Dean, Graduate School of Business, Stanford University (2,4) Stanford, California dorothy a. terrell Limited Partner, First Light Capital (venture capital) (1,5*) Boston, Massachusetts board committees 1 Audit 2 Compensation 3 Finance 4 Corporate Governance 5 Public Responsibility * Denotes Committee Chair Corporate Governance Practices We have a long-standing commitment to strong corporate governance. The cornerstone of our practices is an independent board of directors. All directors stand annually for election by shareholders, and all board committees are composed entirely of independent directors. In addition, our management practices demand high standards of ethics as described in our employee Code of Conduct. For more information on our governance practices, see our Web site and our 2007 Proxy Statement.

23 2007 Annual Report 21 Senior Management mark w. addicks Senior Vice President, Chief Marketing Officer y. marc belton Executive Vice President, Worldwide Health, Brand and New Business Development peter j. capell Senior Vice President, International Marketing and Sales gary chu Senior Vice President; President, Greater China juliana l. chugg Senior Vice President; President, Pillsbury USA giuseppe a. d angelo Senior Vice President; President, Europe, Latin America and Africa randy g. darcy Executive Vice President, Worldwide Operations and Technology peter c. erickson Senior Vice President, Innovation, Technology and Quality ian r. friendly Executive Vice President; Chief Operating Officer, U.S. Retail jeffrey l. harmening Vice President; President, Big G Cereals david p. homer Vice President; President, Canada james a. lawrence Vice Chairman and Chief Financial Officer john t. machuzick Senior Vice President; President, Bakeries and Foodservice siri s. marshall Senior Vice President, General Counsel, Chief Governance and Compliance Officer and Secretary michele s. meyer Vice President; President, Small Planet Foods maria s. morgan Vice President; President, Foodservice donal l. mulligan Senior Vice President, Financial Operations james h. murphy Vice President; President, Meals kimberly a. nelson Vice President; President, Snacks Unlimited christopher d. o leary Executive Vice President; Chief Operating Officer, International michael a. peel Senior Vice President, Human Resources and Corporate Services kendall j. powell President and Chief Operating Officer jeffrey j. rotsch Executive Vice President, Worldwide Sales and Channel Development stephen w. sanger Chairman of the Board and Chief Executive Officer christina l. shea Senior Vice President, External Relations and President, General Mills Foundation ann w.h. simonds Vice President; President, Baking Products christi l. strauss Senior Vice President; Chief Executive Officer, Cereal Partners Worldwide kenneth l. thome Senior Vice President, Finance robert f. waldron Senior Vice President; President, Yoplait-Colombo

24 22 Selected Financial Information Selected financial information this section highlights selected information on our performance and future expectations. for a complete presentation of general millsʼ financial results, please see the financial review section beginning on page 25 of this report. Offsetting Higher Input Costs Our long-term growth model calls for segment operating profits to grow faster than sales, creating margin expansion over time. In the past several years, we and other food manufacturers have faced sustained inflation on ingredient and energy costs. This cost inflation has pressured our profit margins. Raw materials, including ingredients and packaging materials, represent approximately 50 percent of General Mills total cost of sales. And energy costs are a key component of both manufacturing and distribution expense Cost of Sales Raw Materials Manufacturing Distribution In 2007, our cost inflation on ingredients and energy totaled $115 million. We were successful in offsetting these higher costs with strong productivity and pricing, and our gross margin expanded by 50 basis points to 36.1 percent of net sales. We are anticipating that cost inflation on ingredients and energy will be higher in 2008 our plan estimate is $250 million. In order to offset these cost pressures, our plans include pricing actions, as well as a continued focus on productivity initiatives. These initiatives include managing our product mix toward higher-profit items, standardizing the raw materials that we purchase, and investing in technology to improve our production efficiency. Gross Margin (percent of net sales)

25 2007 Annual Report 23 Investing to Build Our Brands We reinvest some of the cash generated by our cost savings initiatives in consumer marketing activities such as advertising, consumer promotions and product sampling. We believe that these brand-building activities generate consumer demand for our products, and drive sales and profit growth. In 2007, we increased our consumer spending by 8 percent, and in 2008, we expect to further increase our consumer marketing investment. Our Priorities for Cash Flow In fiscal 2007, our cash flow from operations totaled nearly $1.8 billion. We reinvested a portion of this cash in capital projects designed to support the growth of our businesses worldwide and to increase productivity. Our investments in capital projects totaled $460 million in 2007, or 3.7 percent of net sales. Projects included adding manufacturing capacity for granola bars, and investing in our processing and packaging of yogurt and cereal. We also completed numerous projects designed to generate cost savings in 2008 and beyond. Consumer Marketing Spending (percent growth) In 2008, our current plans call for capital investments of approximately $575 million. Over the next three years combined, we expect our capital investments to average less than 4 percent of annual net sales. Capital Expenditures (dollars in millions) Estimate 360 Our segment operating profit margin increased by 20 basis points in 2007, including our increased investment in marketing activities. In 2008, our target again is to grow segment operating profit faster than sales, consistent with our longterm growth model. Segment Operating Profit Margin* (percent of net sales) Estimate We expect that more than 60 percent of our 2008 capital investments will be focused on growth projects and productivity initiatives. For example, we plan to add manufacturing capacity for yogurt and granola bars to support continued growth on these businesses. We expect to realize cost savings from a wide variety of initiatives, such as simplifying and automating some of our packaging lines for Pillsbury USA. * See page 47 for discussion of this non-gaap measure

26 24 Selected Financial Information 2008 Capital Expenditures Growth Cost Savings Essential In total, we returned more than $1.8 billion in cash to General Mills shareholders in 2007 through dividends and share repurchases. We view dividends as an important component of shareholder return. In fact, General Mills and its predecessor firm have paid regular dividends without interruption or reduction for 109 years. During 2007, we made two increases to the quarterly dividend rate. As 2008 began, the board of directors approved a further 2-cent increase in the quarterly dividend to 39 cents per share, effective with the Aug. 1, 2007, payment. The new annualized rate of $1.56 per share represents an 8 percent increase over dividends paid in It is our goal to continue paying dividends roughly in line with the payout ratios of our peer group, and to increase dividends over time as our earnings grow. In 2007, we repurchased 25 million shares of General Mills stock. In 2008, we expect to reduce total shares outstanding another net 2 percent. Looking ahead, we intend to remain disciplined in our capital investment and continue returning significant cash to shareholders through dividends and share repurchases. We expect these actions, coupled with the growth in earnings that we have targeted, to result in improving return on capital (ROC). In 2007, our ROC increased by 60 basis points from 2006 results. Our long-term goal is to improve ROC by an average of 50 basis points a year. Returns to Shareholders Our objective is to deliver consistent financial performance that coupled with an attractive dividend yield results in double-digit returns to our shareholders over the long term. In fiscal 2007, the total return to General Mills shareholders exceeded 19 percent. Over the last three years, we generated a compound annual total shareholder return of 12 percent. This three-year performance was slightly lower than the return generated by the broad market, but exceeded our peer group s performance over the same time period. Total Shareholder Return, Fiscal (compound growth rate, price appreciation plus reinvested dividends) Average Diluted Shares Outstanding (in millions) General Mills S&P 500 Index S&P Packaged Foods Index Goal

27 Financial Review TABLE OF CONTENTS Page Six-year Financial Summary 26 Management s Discussion and Analysis of Financial Condition and Results of Operations 27 Reports of Management 51 Reports of Independent Registered Public Accounting Firm 52 Consolidated Financial Statements 54 Notes to Consolidated Financial Statements 58 1 Basis of Presentation and Reclassifications 58 2 Summary of Significant Accounting Policies 58 3 Acquisitions and Divestitures 63 4 Restructuring, Impairment, and Other Exit Costs 63 5 Investments in Joint Ventures 64 6 Goodwill and Other Intangible Assets 65 7 Financial Instruments and Risk Management Activities 66 8 Debt 69 9 Minority Interests Stockholders Equity Stock Plans Earnings Per Share Retirement and Postemployment Benefits Income Taxes Leases and Other Commitments Business Segment and Geographic Information Supplemental Information Quarterly Data 85 Glossary 86 Total Return to Stockholders 87

28 26 Six-year Financial Summary In Millions, Except per Share Data and Number of Employees Fiscal Year Ended May 27, 2007 Operating data: Net sales $12,442 $11,712 $11,308 $11,122 $10,544 $ 7,949 Gross margin (a) 4,487 4,167 3,982 4,088 3,969 2,970 Selling, general and administrative expenses 2,390 2,179 1,998 2,052 2,050 1,756 Restructuring, impairment and other exit costs Operating profit 2,058 1,958 1,900 2,010 1,857 1,080 Divestitures (gain) (499) Debt repurchase costs 137 Interest expense, net Income taxes After-tax earnings from joint ventures Net earnings 1,144 1,090 1,240 1, Average shares outstanding: Basic Diluted Net earnings per share: Basic $ 3.30 $ 3.05 $ 3.34 $ 2.82 $ 2.49 $ 1.38 Diluted $ 3.18 $ 2.90 $ 3.08 $ 2.60 $ 2.35 $ 1.34 Depreciation and amortization $ 418 $ 424 $ 443 $ 399 $ 365 $ 296 Advertising and media expense Research and development expense Balance sheet data: Land, buildings and equipment $ 3,014 $ 2,997 $ 3,111 $ 3,197 $ 3,087 $ 2,842 Total assets 18,184 18,075 17,923 18,331 18,087 16,540 Long-term debt, excluding current portion 3,218 2,415 4,255 7,410 7,516 5,591 Total debt (a) 6,206 6,049 6,192 8,226 8,857 9,439 Stockholders equity 5,319 5,772 5,676 5,248 4,175 3,576 Cash flow trends: Net cash provided by operating activities 1,765 1,848 1,794 1,521 1, Capital expenditures Net cash provided (used) by investing activities (597) (369) 413 (530) (1,113) (3,288) Net cash provided (used) by financing activities (1,398) (1,405) (2,385) (943) (885) 3,269 Other data: Stock price range: Low $ $ $ $ $ $ High $ $ $ $ $ $ Year-end $ $ $ $ $ $ Cash dividends per common share $ 1.44 $ 1.34 $ 1.24 $ 1.10 $ 1.10 $ 1.10 Number of full- and part-time employees 28,580 28,147 27,804 27,580 27,338 28,519 Fiscal 2004 was a 53-week year; all other fiscal years were 52 weeks. In fiscal 2007, we adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R), resulting in an after-tax reduction to stockholders equity of $440 million, and SFAS No. 123R, Share Based Payment, resulting in a decrease to fiscal 2007 net earnings of $43 million, and a decrease to fiscal 2007 cash flows from operations and corresponding decrease to cash flows used by financing activities of $73 million. See Notes 2 and 13 to the Consolidated Financial Statements. (a) See Glossary on page 86 for definition. May 28, 2006 May 29, 2005 May 30, 2004 May 25, 2003 May 26, 2002

29 27 Management s Discussion and Analysis of Financial Condition and Results of Operations EXECUTIVE OVERVIEW We are a global consumer foods company. We develop distinctive food products and market these value-added products under unique brand names. We work continuously on product innovation to improve our established brands and to create new products that meet consumers evolving needs and preferences. In addition, we build the equity of our brands over time with strong consumer-directed marketing and innovative merchandising. We believe our brand-building strategy is the key to winning and sustaining leading share positions in markets around the globe. Our fundamental business goal is to generate superior returns for our stockholders over the long term. We believe that increases in net sales, segment operating profits, earnings per share, and return on average total capital are the key measures of financial performance for our businesses. See pages 47 and 48 for our discussion of segment operating profit and return on average total capital, which are not defined by generally accepted accounting principles (GAAP). Our objectives are to consistently deliver: low single-digit average annual growth in net sales; mid single-digit average annual growth in total segment operating profit; high single-digit average annual growth in earnings per share (EPS); and at least a 50 basis point average annual increase in return on average total capital. We believe that this financial performance, coupled with an attractive dividend yield, should result in long-term value creation for stockholders. We also return a substantial amount of cash annually to stockholders through share repurchases. For the fiscal year ended May 27, 2007, our net sales grew 6 percent, total segment operating profit grew 7 percent, diluted EPS increased 10 percent, and our return on average total capital improved by 60 basis points. These results met or exceeded our long-term targets. Net cash provided by operations totaled nearly $1.8 billion in fiscal 2007, enabling us to increase our annual dividend payments per share by 7.5 percent from fiscal 2006 and continue returning cash to stockholders through share repurchases, which totaled $1,321 million in fiscal We made significant capital investments totaling $460 million to support future growth and productivity. We achieved each of our four key operating objectives for fiscal 2007: We generated net sales growth across our businesses. Both Big G cereals and Pillsbury USA renewed net sales growth in fiscal 2007 following modest sales declines in fiscal In addition, all of our other U.S. Retail divisions and our International and Bakeries and Foodservice segments each posted net sales gains in fiscal We achieved net sales contributions from new products, as we introduced more than 400 new food items in markets around the world. We capitalized on growth opportunities for our brands in new channels and international markets. During 2007, we increased our unit volume and net sales in fast-growing retail channels such as drug, dollar and discount stores, convenience stores, and supercenters. Outside the United States, International segment net sales increased 16 percent in fiscal 2007 and exceeded $2 billion for the first time. We also recorded increases in both gross margin and segment operating profit in fiscal 2007, despite continued input cost inflation and a significant increase in our consumer marketing spending. Details of our financial results are provided in the Fiscal 2007 Consolidated Results of Operations section below. Our fiscal 2008 operating objectives are consistent with our long-term growth model and are built around broadbased growth in net sales, focused cost-savings initiatives to offset higher input costs, and increased levels of investment in media and other brand-building marketing programs to fuel continued net sales growth. To drive growth in net sales, we plan to increase unit volumes, improve sales mix, and achieve net price realization through a combination of pricing actions and trade promotion efficiencies. We also will continue to focus on faster-growing retail formats and foodservice channels such as membership and convenience stores, and expand our branded product sales to hospitality and healthcare-related foodservice customers with new products and portion sizes. Internationally, we are focused on building our global brands. Our company-wide cost-saving initiatives include evaluating sales mix and trade spending efficiency, portfolio management techniques including product rationalization and simplification, capital investments in manufacturing technology, and global sourcing. We expect pricing and cost-savings initiatives to help us largely offset significant input cost inflation, especially for dairy ingredients, oils (primarily soybean), and grains. Our plans also call for reinvestment of some of these cost savings in

30 28 media and other brand-building marketing programs, resulting in another high single-digit increase in these expenditures. Our plans also call for $575 million of expenditures for capital projects, and a significant amount of cash returned to stockholders. We intend to continue repurchasing shares in fiscal 2008, with a goal of reducing average diluted shares outstanding a net 2 percent. On June 25, 2007, our Board of Directors approved a dividend increase to an annual rate of $1.56 per share. This represents a 9 percent compound annual growth rate in dividends from fiscal 2004 to fiscal Application of hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), requires significant resources, recordkeeping, and analytical systems. As a result of the rising compliance costs and the complexity associated with the application of hedge accounting, we have elected to discontinue the use of hedge accounting for our commodity derivatives at the beginning of fiscal 2008 for all new commodity derivatives entered into after that date. Accordingly, the changes in the values of these derivatives will be recorded in earnings currently, resulting in volatility in both net earnings and gross margin. These gains and losses will be reported in cost of sales in our Consolidated Statements of Earnings and in unallocated corporate expenses in our segment operating results. Regardless of designation for accounting purposes, we believe all our commodity hedges are economic hedges of our risk exposures. Commodity derivatives previously accounted for as cash flow hedges are not affected by this change and any gains or losses deferred to accumulated other comprehensive income (loss) in stockholders equity will remain there until the hedged item affects earnings. Certain terms used throughout this report are defined in a glossary on page 86 of this report. FISCAL 2007 CONSOLIDATED RESULTS OF OPERATIONS For fiscal 2007, we reported diluted EPS of $3.18, up 10 percent from $2.90 per share earned in fiscal Earnings after tax were $1,144 million in fiscal 2007, up 5 percent from $1,090 million in fiscal The components of net sales growth are shown in the following table: Components of Net Sales Growth Fiscal 2007 vs Unit Volume Growth +4 pts Price/Product Mix +2 pts Foreign Currency Exchange +1 pt Trade and Coupon Promotional Expenses Flat Net Sales Growth +6% Table does not add due to rounding. Net sales for fiscal 2007 grew 6 percent to $12.4 billion, driven by 4 percentage points of unit volume growth, primarily in our U.S. Retail and International segments, and 2 percentage points of growth from pricing and favorable product mix across many of our businesses. In addition, foreign currency exchange effects added 1 percentage point of growth, while promotional spending was flat compared to fiscal Cost of sales was up $410 million in fiscal 2007 versus fiscal Cost of sales as a percent of net sales decreased from 64.4 percent in fiscal 2006 to 63.9 percent in fiscal 2007 as $115 million of higher ingredient (primarily grains and dairy) and energy costs were more than offset by efficiency gains at our manufacturing facilities. These gains resulted from cost-saving capital projects, the operating benefits of our broad-based unit volume growth, changes to product formulations, and continued actions to replace low-turning products with faster-turning items. Selling, general and administrative (SG&A) expenses increased by $211 million in fiscal 2007 versus fiscal SG&A expense as a percent of net sales increased from 18.6 percent in fiscal 2006 to 19.2 percent in fiscal The increase in SG&A expense from fiscal 2006 was largely the result of a $78 million increase in media and brand-building consumer marketing spending and $69 million of incremental stock compensation expense resulting from our adoption of SFAS No. 123 (Revised), Share-Based Payment (SFAS 123R). Net interest expense for fiscal 2007 totaled $427 million, $28 million higher than net interest expense for fiscal Higher interest rates caused nearly all of the increase. Interest expense includes preferred distributions paid on subsidiary minority interests. The average rate on our total outstanding debt and subsidiary minority interests was 6.1 percent during fiscal 2007, compared to 5.8 percent during fiscal 2006.

31 29 Restructuring, impairment and other exit costs totaled $39 million in fiscal 2007 as follows: Expense (Income), in millions Noncash impairment charge for certain Bakeries and Foodservice product lines $37 Gain from the sale of our previously closed plant in San Adrian, Spain (7) Loss from divestitures of our par-baked bread and frozen pie product lines 10 Adjustment of reserves from previously announced restructuring actions (1) Total $39 In late May 2007, we concluded that the future cash flows generated by certain product lines in our Bakeries and Foodservice segment will be insufficient to recover the net book value of the related long-lived assets. We recorded a noncash impairment charge of $37 million against these assets in the fourth quarter of fiscal We are further evaluating the viability of the impaired product lines and may incur additional charges in the future, depending upon the outcome of those evaluations. Net proceeds received for the par-baked bread product line were $13 million, and net proceeds from the sale of our frozen pie product line were $1 million. The effective income tax rate was 34.3 percent for fiscal 2007, including an increase of $30 million in benefits from our international tax structure and benefits from the settlement of tax audits. In fiscal 2006, our effective income tax rate was 34.5 percent, including the benefit of $11 million of adjustments to deferred tax liabilities associated with our International segment s brand intangibles. After-tax earnings from joint ventures totaled $73 million in fiscal 2007, compared to $69 million in fiscal In fiscal 2007, net sales for Cereal Partners Worldwide (CPW) grew 18 percent, including 6 points of incremental sales from the Uncle Tobys cereal business it acquired in Australia. In February 2006, CPW announced a restructuring of its manufacturing plants in the United Kingdom. Our after-tax earnings from joint ventures were reduced by $8 million in both fiscal 2007 and 2006 for our share of the restructuring costs, primarily accelerated depreciation and severance. Net sales for our Häagen-Dazs joint ventures in Asia declined 7 percent in fiscal 2007, reflecting a change in our reporting period for these joint ventures. We changed this reporting period to include results through March 31. In previous years, we included results for the twelve months ended April 30. Accordingly, fiscal 2007 included only 11 months of results from these joint ventures, compared to 12 months in fiscal The impact of this change was not material to our consolidated results of operations, so we did not restate prior periods for comparability. Average diluted shares outstanding decreased by 19 million from fiscal 2006 due to our repurchase of 25 million shares of stock during fiscal 2007, partially offset by increases in diluted shares outstanding from the issuance of annual stock awards. FISCAL 2007 CONSOLIDATED BALANCE SHEET ANALYSIS As of May 27, 2007, we adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans: An amendment of FASB Statements No. 87, 88, 106 and 132R (SFAS 158). SFAS 158 requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability and recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income (loss), which is a component of stockholders equity. As a result of the implementation of SFAS 158, we recognized an after-tax decrease in accumulated other comprehensive income (loss) of $440 million for all of our defined benefit pension, other postretirement, and postemployment benefit plans. Other balances affected by the adoption of SFAS 158 are identified in the analysis below. Prior periods were not restated. Cash and cash equivalents decreased by $230 million from fiscal 2006 due to our acquisitions of Saxby Bros. Limited in the United Kingdom and the funding of our share of CPW s acquisition of Uncle Tobys in Australia. Receivables increased $41 million from fiscal 2006, driven mainly by higher international sales levels and foreign exchange translation, partially offset by a decrease in domestic receivables due mainly to the timing of sales in the month of May. The allowance for doubtful accounts was essentially unchanged from fiscal Inventories increased $119 million from fiscal 2006, due primarily to a higher level of finished goods in advance of our package size modification of Big G cereals in early fiscal 2008, and increases in grain inventories due to higher quantities and prices. These increases were partially offset by an increase in the reserve for the excess of first in, first out (FIFO) inventory costs over last in, first out (LIFO) inventory costs of $16 million. Land, buildings and equipment increased $17 million, as capital expenditures of $460 million were offset by normal depreciation and disposal of assets related to the sales of our Chelsea, Tempe, Rochester, and San Adrian facilities. In addition, we recorded $37 million of impairment charges against certain long-lived assets related to underperforming product lines in our Bakeries and Foodservice segment. Goodwill and other intangible assets increased $270 million from fiscal 2006, primarily from foreign currency translation. Our international acquisitions, including CPW s

32 30 acquisition of Uncle Tobys, completed during fiscal 2007 increased these intangibles by $58 million. Other assets decreased by $191 million from fiscal Our prepaid pension asset decreased by $304 million following our annual changes in assumptions, fiscal 2007 asset performance, and our adoption of SFAS No This decrease was partially offset by a $109 million increase in our investments in joint ventures, consisting primarily of loans to and additional equity investments in CPW to finance its acquisition of Uncle Tobys. Accounts payable increased $105 million to $778 million in fiscal 2007 from higher vendor payables that were generally in line with increases in inventories, and from foreign exchange translation. Long-term debt, the current portion of long-term debt, and notes payable together increased $157 million from fiscal We issued $1.5 billion of long-term debt that replaced long-term debt maturing in fiscal We issued $1.15 billion of convertible notes in fiscal 2007 that were used to repay commercial paper. We also carried higher levels of debt as of May 27, 2007, due to increased share repurchases. In addition, as of May 27, 2007, we consolidated a variable interest entity (VIE) in which we are the primary beneficiary (PB), resulting in a $37 million increase to total debt. As of May 27, 2007, we also recorded $23 million of debt for capital lease obligations related to certain contractual relationships with third parties. The current and noncurrent portions of deferred income taxes decreased $274 million to $1.4 billion primarily due to a reclassification of $248 million of deferred taxes to accumulated other comprehensive income (loss), a component of stockholders equity, following our adoption of SFAS 158. We also incurred $26 million of deferred income tax expense in fiscal Other current liabilities increased $248 million to $2,079 million primarily due to a $118 million increase in accrued income taxes and a $56 million increase in unsettled share repurchases. Other liabilities increased $306 million, primarily the result of an increase in accrued other postretirement and postemployment benefit liabilities following our annual changes in assumptions, fiscal 2007 asset performance, and our adoption of SFAS 158. Retained earnings increased $638 million, reflecting fiscal 2007 net earnings of $1,144 million less dividends of $506 million. Treasury stock increased $1,035 million from fiscal 2007 share repurchases of $1,385 million, offset by shares issued for stock option exercises and restricted stock unit vesting. Additional paid in capital increased $105 million including a $84 million decrease from the reclassification of unearned compensation resulting from our adoption of SFAS 123R, an $11 million after-tax decrease from the issuance of shares to settle the conversion premium on our zero coupon contingently convertible debentures, and a $95 million decrease from the issuance of stock awards during fiscal 2007, offset by an increase of $105 million from current year stock option exercises and $128 million of stock compensation expense recognized in fiscal 2007 earnings. Accumulated other comprehensive income (loss) decreased by $245 million after-tax, including a $440 million after-tax reduction from our adoption of SFAS 158 offset by favorable foreign exchange translation of $194 million. FISCAL 2006 CONSOLIDATED RESULTS OF OPERATIONS For fiscal 2006, we reported diluted EPS of $2.90. This was down 6 percent from $3.08 per share earned in fiscal 2005, which included a significant net gain from divestitures and debt repurchases. Earnings after tax were $1,090 million in fiscal 2006, down 12 percent from $1,240 million in fiscal 2005, primarily due to the net benefit of gains on divestitures and debt repurchase costs in fiscal The components of net sales growth are shown in the following table: Components of Net Sales Growth Fiscal 2006 vs Unit Volume Growth +2 pts Price/Product Mix +1 pt Foreign Currency Exchange Flat Trade and Coupon Promotion Expense Flat Net Sales Growth +4% Table does not add due to rounding. Net sales for fiscal 2006 grew 4 percent to $11.7 billion, driven by 2 percentage points of unit volume growth, primarily in U.S. Retail and International, and 1 percentage point of growth from pricing and product mix across many of our businesses. Foreign currency exchange effects and promotional spending were flat compared to fiscal Cost of sales was up $219 million in fiscal 2006 versus fiscal 2005, primarily due to unit volume increases and a $89 million increase in customer freight expense, as manufacturing efficiencies largely offset cost increases due to inflation. Also, the year-over-year change in cost of sales was favorably impacted by the following costs incurred in fiscal 2005: $18 million in expense from accelerated depreciation associated with exit activities, as described below; and $5 million of product recall costs. Cost of sales as a percent of net sales decreased from 64.8 percent in fiscal 2005 to 64.4 percent in fiscal SG&A expense increased by $181 million in fiscal SG&A expense as a percent of net sales increased from

33 percent in fiscal 2005 to 18.6 percent in fiscal The increase in SG&A expense from fiscal 2005 was largely the result of: a $97 million increase in domestic employee benefit costs, including incentives; a $49 million increase in consumer marketing spending; and a $23 million increase in environmental reserves. Restructuring, impairment and other exit costs totaled $30 million in fiscal The components of this expense are summarized in the table below: In Millions Closure of our Swedesboro, New Jersey plant $13 Closure of a production line at our Montreal, Quebec plant 6 Restructuring actions at our Allentown, Pennsylvania plant 4 Asset impairment charge at our Rochester, New York plant 3 Adjustment of reserves from previously announced restructuring actions 4 Total $30 In fiscal 2005, we recorded restructuring, impairment, and other exit costs pursuant to approved plans as follows: In Millions Charges associated with supply chain initiatives $44 Relocation of a frozen baked goods line from our Boston, Massachusetts plant 30 Bakeries and Foodservice severance charges 3 Adjustment of reserves from previously announced restructuring actions 7 Total $84 The supply chain initiatives were undertaken to further increase asset utilization and reduce manufacturing and sourcing costs, resulting in decisions regarding plant closures and production realignment. The actions included decisions to: close our flour milling plant in Vallejo, California; close our par-baked bread plant in Medley, Florida; relocate bread production from our Swedesboro, New Jersey plant; relocate a portion of our cereal production from our plant in Cincinnati, Ohio; close our snacks foods plant in Iowa City, Iowa; and close our dry mix production at Trenton, Ontario. Net interest expense for fiscal 2006 totaled $399 million, $56 million lower than interest expense for fiscal 2005 of $455 million, primarily as the result of debt pay down and the maturation of interest rate swaps. In fiscal 2006, we had interest rate swaps that converted $500 million of fixed-rate debt to floating rates. Taking into account the effect of our interest rate swaps, the average interest rate on our total outstanding debt and subsidiary minority interests was 5.8 percent in fiscal 2006, compared to 5.9 percent in fiscal The effective income tax rate was 34.5 percent for fiscal 2006, including the benefit of $11 million of adjustments to deferred tax liabilities associated with our International segment s brand intangibles. In fiscal 2005, our effective income tax rate was 36.6 percent, higher than fiscal 2005 primarily due to the tax impacts of our fiscal 2005 divestitures. After-tax earnings from joint ventures totaled $69 million in fiscal 2006, compared to $94 million in fiscal Earnings from joint ventures in fiscal 2005 included $28 million from our Snack Ventures Europe (SVE) joint venture with PepsiCo, Inc., which we divested on February 28, In fiscal 2006, net sales for CPW grew 4 percent. In February 2006, CPW announced a restructuring of its manufacturing plants in the United Kingdom. Our after-tax earnings from joint ventures was reduced by $8 million for our share of the restructuring costs, primarily accelerated depreciation and severance, incurred in fiscal Net sales for our Häagen- Dazs joint ventures in Asia declined 7 percent from fiscal 2005 due to an unseasonably cold winter and increased competitive pressure in Japan. Average diluted shares outstanding decreased by 30 million from fiscal This was primarily due to the repurchase of a significant portion of our zero coupon contingently convertible debentures in October 2005 and the completion of a consent solicitation related to the remaining convertible debentures in December These actions ended the dilutive accounting effect of these debentures in our EPS calculations. In addition, we repurchased 19 million shares of our stock during fiscal 2006, partially offset by the issuance of shares upon stock option exercises. RESULTS OF SEGMENT OPERATIONS Our businesses are organized into three operating segments: U.S. Retail, International, and Bakeries and Foodservice. The following tables provide the dollar amount and percentage of net sales and operating profit from each reportable segment for fiscal years 2007, 2006, and 2005: Net Sales Dollars In Millions, Fiscal Year Net Sales Percent of Net Sales Net Sales Percent of Net Sales Net Sales Percent of Net Sales U.S. Retail $ 8,491 68% $ 8,137 69% $ 7,891 70% International 2, , , Bakeries and Foodservice 1, , , Total $12, % $11, % $11, %

34 32 Segment Operating Profit Dollars In Millions, Fiscal Year Segment Operating Profit Percent of Segment Operating Profit Segment Operating Profit Percent of Segment Operating Profit Segment Operating Profit Percent of Segment Operating Profit U.S. Retail $1,896 84% $1,801 85% $1,745 87% International Bakeries and Foodservice Total $2, % $2, % $2, % Segment operating profit excludes unallocated corporate expenses of $163 million for fiscal 2007, $123 million for fiscal 2006, and $32 million for fiscal 2005; and also excludes restructuring, impairment and other exit costs because these items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by our executive management. U.S. RETAIL SEGMENT Our U.S. Retail segment reflects business with a wide variety of grocery stores, mass merchandisers, membership stores, natural food chains, and drug, dollar and discount chains operating throughout the United States. Our major product categories in this business segment are ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup, dry dinners, shelf stable and frozen vegetables, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, microwave popcorn, and a wide variety of organic products including soup, granola bars, and cereal. The components of the changes in net sales are shown in the following table: Components of U.S. Retail Change in Net Sales Fiscal 2007 vs Fiscal 2006 vs Unit Volume Growth +4 pts +2 pts Price/Product Mix Flat Flat Trade and Coupon Promotion Expense Flat +1 pt Change in Net Sales +4% +3% In fiscal 2007, net sales for our U.S. Retail operations were $8.5 billion, up 4 percent from fiscal This growth in net sales was the result of a 4 percentage point increase in unit volume, led by strong growth in our grain snacks business, as well as volume increases in our Yoplait, Meals, and Pillsbury USA divisions. The unit volume increase was largely driven by higher levels of consumer marketing spending and new product innovation, resulting in higher sales to key customers. Net sales for this segment totaled $8.1 billion in fiscal 2006 and $7.9 billion in fiscal Unit volume increased 2 points in fiscal 2006 versus fiscal 2005, led by strong growth in our Yoplait business and volume increases in our Meals, Baking Products and Snacks divisions. Favorable trade and coupon spending also contributed 1 point to the fiscal 2006 increase in net sales, as the rate of promotional activity decreased on a year-over-year basis, largely the result of narrowing price gaps between our products and competitors products in several heavily promoted categories. All of our U.S. Retail divisions experienced net sales growth in fiscal 2007 as shown in the tables below: U.S. Retail Net Sales by Division Dollars In Millions, Fiscal Year U.S. Retail: Big G $1,933 $1,903 $1,919 Meals 1,909 1,816 1,697 Pillsbury USA 1,591 1,550 1,562 Yoplait 1,171 1, Snacks 1, Baking Products Small Planet Foods and Other Total U.S. Retail $8,491 $8,137 $7,891 U.S. Retail Change in Net Sales by Division Fiscal 2007 vs Fiscal 2006 vs Big G +2% 1% Meals Pillsbury USA +3 1 Yoplait Snacks Baking Products Small Planet Foods Total U.S. Retail +4% +3% In fiscal 2007, Big G cereals net sales grew 2 percent as a result of new product launches such as Fruity Cheerios and Nature Valley cereals, and continued strong performance of the Cheerios franchise. Net sales for the Meals division grew by 5 percent led by the introduction of Progresso reduced sodium soups and Hamburger Helper Microwave Singles, and the continued strong performance of our other Hamburger Helper and Progresso offerings. Net sales for Pillsbury USA increased 3 percent as core refrigerated dough products, Totino s Pizza Rolls pizza snacks and Toaster Strudel pastries all generated solid growth. The Yoplait division s net sales grew 6 percent primarily due to strong performance by Yoplait Light, Go-GURT, and Yoplait Kids yogurt. Net sales for the Snacks division grew 10 percent led by continuing growth for Nature Valley granola bars and the introduction of Fiber One bars. Baking Products net sales grew 3 percent reflecting greater focus on product lines such as Bisquick baking mix and Warm Delights microwaveable desserts.

35 33 For fiscal 2006, Big G cereals net sales declined 1 percent as our merchandising activity lagged competitors levels, particularly in the first half of the year. The Meals division s net sales grew by 7 percent led by Progresso soup and Hamburger Helper. Pillsbury USA net sales declined 1 percent due to weakness in frozen breakfast items, frozen baked goods, and refrigerated cookies. Net sales for the Yoplait division grew 14 percent over fiscal 2005 primarily due to growth in established cup yogurt lines. Net sales for the Snacks division grew 5 percent led by Nature Valley granola bars and Chex Mix products. Baking Products net sales grew 6 percent reflecting the introduction of Warm Delights microwaveable desserts and strong performance during the holiday baking season. Operating profit of $1.9 billion in fiscal 2007 improved $95 million, or 5 percent, over fiscal Unit volume increased operating profit by $127 million, and inflation in ingredients (primarily grains and dairy), energy, and labor costs was more than offset by efficiency gains at our manufacturing facilities resulting from cost-saving capital projects, changes to product formulations, and continued actions to reduce low-turning products. These increases in operating profit were partially offset by $46 million of brand-building consumer marketing spending. Operating profit of $1.8 billion in fiscal 2006 improved $56 million, or 3 percent, over fiscal Unit volume increases accounted for approximately $89 million of improvement. Net pricing realization and product mix contributed $98 million. These factors exceeded manufacturing and distribution rate increases of $77 million, and increases in consumer marketing spending of $32 million. INTERNATIONAL SEGMENT In Canada, our major product categories are ready-to-eat cereals, shelf stable and frozen vegetables, dry dinners, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza snacks, and grain, fruit and savory snacks. In markets outside North America, our product categories include super-premium ice cream, grain snacks, shelf stable and frozen vegetables, dough products, and dry dinners. Our International segment also includes products manufactured in the United States for export internationally, primarily to the Caribbean and Latin American markets, as well as products we manufacture for sale to our international joint ventures. Revenues from export activities are reported in the region or country where the end customer is located. These international businesses are managed through 34 sales and marketing offices. The components of net sales growth are shown in the following table: Components of International Change in Net Sales Fiscal 2007 vs Fiscal 2006 vs Unit Volume Growth +8 pts +4 pts Price/Product Mix +6 pts +2 pts Foreign Currency Exchange +4 pts +1 pt Trade and Coupon Promotion Expense -2 pts 1 pt Change in Net Sales +16% +6% For fiscal 2007, net sales for our International segment were $2.1 billion, up 16 percent from fiscal This growth was largely driven by a 15 percent increase in net sales of Häagen-Dazs ice cream and the continued strong performance of Green Giant and Old El Paso products across Europe. Acquisitions made in fiscal 2007 contributed less than 1 point of net sales growth. Four points of net sales growth came from favorable foreign exchange. Net sales totaled $1.8 billion in fiscal 2006 and $1.7 billion in fiscal For fiscal 2006 versus fiscal 2005, unit volumegrew4percent,drivenbya6percentincreaseinthe Asia/Pacific region. Net sales growth for our International segment by geographic region is shown in the following tables: International Net Sales by Geographic Region Dollars In Millions, Fiscal Year Europe $ 756 $ 629 $ 622 Canada Asia/Pacific Latin America and South Africa Total International $2,124 $1,837 $1,725 International Change in Net Sales by Geographic Region Fiscal 2007 vs Fiscal 2006 vs Europe +20% +1% Canada Asia/Pacific Latin America and South Africa Total International +16% +6% In fiscal 2007, net sales in Europe grew 20 percent reflecting 15 percent growth in net sales of Häagen-Dazs ice cream and continued strong performance from OldElPaso and Green Giant across the region, and especially in the United Kingdom. The acquisition of Saxby Bros. Limited, a chilled pastry company in the United Kingdom, contributed less than 1 point of net sales growth. Net sales in Canada increased 8 percent, led by 35 percent net sales growth on Nature Valley snack bars, 6 percent net sales growth in cereals and 11 percent net sales growth on OldElPasoproducts. Asia/Pacific net sales increased 14 percent led by 17 percent net sales growth for Häagen-Dazs in China. Latin America

36 34 and South Africa net sales increased 21 percent led by 20 percent growth in our Diablitos product line and the re-launch of Häagen-Dazs in Latin America. Operating profit for fiscal 2007 grew to $216 million, up 11 percent from fiscal 2006, with foreign currency exchange contributing 5 points of that growth. The growth was led by a $48 million increase from higher volumes driven by increases in consumer marketing spending. Net price realization offset supply chain and administrative cost increases. Operating profit for fiscal 2006 grew to $194 million, up 19 percent from the prior year, with foreign currency exchange effects contributing 2 percentage points of that growth. Improvement in unit volume contributed $24 million, net price realization of $46 million more than offset the effects of supply chain cost changes, and consumer marketing spending increased $24 million. BAKERIES AND FOODSERVICE SEGMENT In our Bakeries and Foodservice segment we sell branded readyto-eat cereals, snacks, dinner and side dish products, refrigerated and soft-serve frozen yogurt, frozen dough products, branded baking mixes, and custom food items. Our customers include foodservice distributors and operators, convenience stores, vending machine operators, quick service and other restaurant operators, and business and school cafeterias in the United States and Canada. In addition, we market mixes and unbaked and fully baked frozen dough products throughout the United States and Canada to retail, supermarket and wholesale bakeries. The components of the change in net sales are shown in the following table: Components of Bakeries and Foodservice Change in Net Sales Fiscal 2007 vs Fiscal 2006 vs Unit Volume Growth +2 pts Flat Price/Product Mix +6 pts +3 pts Divested Product Lines 2 pts Flat Trade and Coupon Promotion Expense 1 pt Flat Change in Net Sales +5% +3% For fiscal 2007, net sales for our Bakeries and Foodservice segment increased 5 percent to $1.8 billion. The growth in fiscal 2007 net sales was driven by: increased sales of higher margin, branded products and the introduction of new products to customers such as schools, hotels, restaurants, and convenience stores; improved innovation in foodservice products; and favorable net price realization. Net sales increased slightly from fiscal 2005 to fiscal Fiscal 2006 unit volume was flat as compared to fiscal 2005, with net price realization and product mix causing the increase in net sales. Net sales growth for our Bakeries and Foodservice segment by customer segment is shown in the following tables: Bakeries and Foodservice Net Sales by Customer Segment Dollars in Millions, Fiscal Year Distributors and restaurants $ 872 $ 894 $ 890 Bakery channels Convenience stores and vending Total Bakeries and Foodservice $1,827 $1,738 $1,692 Bakeries and Foodservice Change in Net Sales by Customer Segment Fiscal 2007 vs Fiscal 2006 vs Distributors and restaurants 2% Flat Bakery channels 14% 5% Convenience stores and vending 12% 6% Total Bakeries and Foodservice 5% 3% Operating profits for the segment were $148 million in fiscal 2007, up 28 percent from $116 million in fiscal The business was able to offset record levels of input cost inflation with a combination of pricing actions, sourcing productivity and manufacturing improvements. Fiscal 2006 operating profits for the segment were $116 million, up 7 percent from $108 million in fiscal Unit volume was flat, and pricing actions essentially covered supply chain cost inflation of $41 million. UNALLOCATED CORPORATE EXPENSES Unallocated corporate expenses include variances to planned corporate overhead expenses, variances to planned domestic employee benefits and incentives, all stock compensation costs, annual contributions to the General Mills Foundation, and other items that are not part of our measurement of segment operating performance. For fiscal 2007, unallocated corporate expenses were $163 million, compared to $123 million in fiscal Fiscal 2007 included $69 million of incremental expense relating to the impact of the adoption of SFAS 123R, and fiscal 2006 included $33 million of charges related to increases in environmental reserves and a write-down of the asset value of a low-income housing investment. Excluding these items, unallocated corporate expenses were essentially unchanged from fiscal Unallocated corporate expenses were $123 million in fiscal 2006 compared to $32 million in fiscal Fiscal 2006 included: higher domestic employee benefit expense, including incentives, which increased by $61 million over fiscal 2005; increases in environmental reserves of $23 million; and a $10 million write-down of the asset value of a low-income housing investment.

37 35 JOINT VENTURES In addition to our consolidated operations, we manufacture and sell products through several joint ventures. International Joint Ventures We have a 50 percent equity interest in CPW that manufactures and markets ready-to-eat cereal products in more than 130 countries and republics outside the United States and Canada. CPW also markets cereal bars in several European countries and manufactures private label cereals for customers in the United Kingdom. Results from our CPW joint venture are reported for the 12 months ended March 31. On July 14, 2006, CPW acquired the Uncle Tobys cereal business in Australia for approximately $385 million. We funded our 50 percent share of the purchase price by making additional advances to and equity contributions in CPW totaling $135 million (classified as investments in affiliates, net, on the Consolidated Statements of Cash Flows) and by acquiring a 50 percent undivided interest in certain intellectual property for $58 million (classified as acquisitions on the Consolidated Statements of Cash Flows). We funded the advances to CPW and our equity contribution from cash generated from our international operations, including our international joint ventures. We have 50 percent equity interests in Häagen-Dazs Japan, Inc. and Häagen-Dazs Korea Company Limited. We also had a 49 percent equity interest in HD Distributors (Thailand) Company Limited. Subsequent to its fiscal year end, we acquired a controlling interest in this joint venture. These joint ventures manufacture, distribute, and market Häagen-Dazs frozen ice cream products and novelties. As noted on page 29, in fiscal 2007, we changed the reporting period for the Häagen-Dazs joint ventures. Accordingly, fiscal 2007 results include only 11 months of results from these joint ventures compared to 12 months in fiscal 2006 and We have a 50 percent equity interest in Seretram, a joint venture for the production of Green Giant canned corn in France. Seretram s results are reported as of and for the 12 months ended April 30. On February 28, 2005, SVE was terminated and our 40.5 percent interest was redeemed. Fiscal 2005 after-tax joint venture earnings include our share of the after-tax earnings of SVE through that date. Domestic Joint Venture We have a 50 percent equity interest in 8th Continent, LLC, a joint venture to develop and market soy-based products. 8th Continent s results are presented on the same basis as our fiscal year. Our share of after-tax joint venture earnings increased from $69 million in fiscal 2006 to $73 million in fiscal This growth was largely driven by strong core brand volume and organic net sales growth, new product innovation, and increases in brand-building consumer marketing spending, partially offset by a $2 million impact of the change in reporting period for the Häagen-Dazs joint ventures. Our share of after-tax joint venture earnings decreased from $94 million in fiscal 2005 to $69 million in fiscal 2006 reflecting the absence of SVE earnings and the inclusion of $8 million of restructuring costs for CPW in fiscal The change in net sales for each joint venture is set forth in the following table: JointVentures Change in Net Sales Fiscal 2007 vs Fiscal 2006 vs CPW +18% +4% Häagen-Dazs (11 months in fiscal 2007 and 12 months in fiscal 2006 and 2005) th Continent Ongoing Joint Ventures (a) +13% +2% (a) Excludes SVE net sales. See pages 47 and 48 for our discussion of this measure not defined by GAAP. For fiscal 2007, CPW net sales grew by 18 percent reflecting the introduction of new products and favorable currency translation. The acquisition of Uncle Tobys in Australia also contributed 6 points of CPW s net sales growth. Net sales for our Häagen-Dazs joint ventures declined 7 percent from fiscal 2006, reflecting the change in our reporting period for these joint ventures. IMPACT OF INFLATION We believe that changes in the general rate of inflation have not had a significant effect on profitability over the three most recent fiscal years other than as noted above related to ingredients, packaging, energy, and employee benefit costs. We attempt to minimize the effects of inflation through appropriate planning and operating practices. Our risk management practices are discussed on pages 49 and 50 of this report. LIQUIDITY The primary source of our liquidity is cash flow from operations. Over the most recent three-year period, our operations have generated $5.4 billion in cash. A substantial portion of this operating cash flow has been returned to stockholders annually through share repurchases and dividends. We also use this source of liquidity to fund our annual capital expenditures. We typically use a combination of available cash, notes payable, and long-term debt to finance acquisitions and major capital expansions.

38 36 Cash Flows from Operations May 27, 2007 May 28, 2006 May 29, 2005 In Millions, for Fiscal Year Ended Net earnings $1,144 $1,090 $1,240 Depreciation and amortization After-tax earnings from joint ventures (73) (69) (94) Stock-based compensation Deferred income taxes Distribution of earnings from joint ventures Tax benefit on exercised options Pension and other postretirement costs (54) (74) (70) Restructuring, impairment and other exit costs Divestitures (gain) (499) Debt repurchase costs 137 Changes in current assets and liabilities Other, net Net Cash Provided by Operating Activities $1,765 $1,848 $1,794 Our cash flow from operations decreased $83 million from fiscal 2006 to fiscal 2007 as an increase in net earnings of $54 million and the net benefit to operating cash flow from stock compensation of $42 million were more than offset by a reduction in our cash flows from working capital of $107 million and a $32 million decrease in distributions of earnings from joint ventures. Changes in working capital were a reduced source of cash flow from operations in fiscal 2007 versus fiscal 2006 primarily reflecting a $32 million decrease in cash flows from accounts receivable, and a $69 million reduction in the source of cash from other current liabilities, primarily from a smaller increase in accrued taxes in fiscal 2007 than in fiscal A key measure that we manage is the growth rate in core working capital. We strive to grow core working capital at or below our growth in net sales. For fiscal 2007, core working capital grew 4 percent, less than our net sales growth of 6 percent. In fiscal 2006, core working capital grew 5 percent, compared to net sales growth of 4 percent, and in fiscal 2005, core working capital decreased 2 percent and net sales grew 2 percent. The increase in cash flows from operations from fiscal 2005 to fiscal 2006 was primarily the result of increases in accrued compensation and accrued income taxes. Cash Flows from InvestingActivities May 27, 2007 May 28, 2006 May 29, 2005 In Millions, for Fiscal Year Ended Purchases of land, buildings and equipment $(460) $(360) $(434) Acquisitions (85) (26) Investments in affiliates, net (100) 1 1 Proceeds from disposal of land, buildings and equipment Proceeds from disposition of businesses 799 Proceeds from dispositions of product lines 14 Other, net Net Cash Provided (Used) by Investing Activities $(597) $(369) $ 413 In fiscal 2007, capital investment for land, buildings, and equipment increased by $100 million to $460 million, as we increased manufacturing capacity for our snack bars and yogurt products and increased spending on cost-saving projects. We expect capital expenditures to increase to approximately $575 million in fiscal 2008, including projects to: consolidate manufacturing for our OldElPasobusiness; enhance distribution capabilities at one of our United States plants; increase our yogurt and chewy snack bar manufacturing capacity; and begin an upgrade of our information technology systems in Latin and South America and Asia. During fiscal 2007, we funded our share of CPW s acquisition of the Uncle Tobys cereal business in Australia (reflected in acquisitions and investments in affiliates, net) and acquired Saxby Bros. Limited, a chilled pastry company in the United Kingdom. In addition, we completed an acquisition of our master franchisee of Häagen-Dazs shops in Greece. We also sold our frozen pie product line, including a plant in Rochester, New York, and our par-baked bread product line, including plants in Chelsea, Massachusetts and Tempe, Arizona.

39 37 Cash Flows from FinancingActivities May 27, 2007 May 28, 2006 May 29, 2005 In Millions, for Fiscal Year Ended Change in notes payable $ (280) $ 1,197 $(1,057) Issuance of long-term debt 2,650 2 Payment of long-term debt (2,323) (1,386) (1,115) Proceeds from issuance of preferred membership interests of subsidiary 835 Common stock issued Tax benefit on exercised options 73 Purchases of common stock for treasury (1,321) (885) (771) Dividends paid (506) (485) (461) Other, net (8) (3) (13) Net Cash Used by Financing Activities $(1,398) $(1,405) $(2,385) Details of each fiscal 2007 financing are described in Note 8 to the Consolidated Financial Statements on pages 69 and 70 of this report. On April 25, 2007, we redeemed or converted all of our zero coupon convertible debentures due The redemption price was settled in cash. For the debentures that were converted, we delivered cash equal to the accreted value of the debentures, including $23 million of accreted original issue discount, and issued 284,000 shares of our common stock worth $17 million to settle the conversion value in excess of the accreted value. This premium was recorded as a reduction to stockholders equity, net of the applicable tax benefit. There was no gain or loss associated with the redemption or conversions. We used proceeds from the issuance of commercial paper to fund the redemption and conversions. During fiscal 2006, we repurchased a significant portion of these debentures pursuant to put rights of the holders for an aggregate purchase price of $1.33 billion, including $77 million of accreted original issue discount. We incurred no gain or loss from this repurchase. We used proceeds from the issuance of commercial paper to fund the purchase price of the debentures. On April 11, 2007, we issued $1.15 billion aggregate principal amount of floating rate convertible senior notes. The notes bear interest at an annual rate equal to one-month London Interbank Offered Rate (LIBOR) minus 0.07 percent, subject to monthly reset. The notes will mature on April 11, Each $1,000 note is convertible into ten shares of our common stock, subject to adjustment in certain circumstances, on any business day prior to maturity. Upon conversion, each holder would receive cash up to the calculated principal amount of the note, and cash or shares at our option for any excess conversion value over the calculated principal amount of each note as described in the note agreement. The notes are unsecured and unsubordinated. The holders of the notes may put them to us for cash equal to the principal amount plus accrued and unpaid interest upon any change of control and on April 11, 2008 and several anniversary dates thereafter. We used the proceeds from the notes to repay outstanding commercial paper. Based on the terms of the notes, we expect them to be put to us on April 11, In January 2007, we issued $1.0 billion of 5.7 percent fixed rate notes due February 15, 2017 and $500 million of floating rate notes due January 22, The proceeds of these notes were used to retire $1.5 billion of fixed rate notes which matured in February The floating rate notes bear interest equal to three-month LIBOR plus 0.13 percent, subject to quarterly reset. The floating rate notes cannot be called by us prior to maturity. The fixed rate notes may be called by us at any time for cash equal to the greater of the principal amount of the notes or a specified make-whole amount, plus, in each case, accrued and unpaid interest. We had previously entered into $700 million of pay-fixed, forward-starting interest rate swaps with an average fixed rate of 5.7 percent in anticipation of the fixed rate note refinancing. We are amortizing a loss deferred to accumulated other comprehensive income (loss) of $23 million associated with these derivatives to interest expense on a straight-line basis over the life of the fixed rate notes. We expect to reclassify $2 million of the deferred loss to earnings over the next 12 months. We used cash from operations to repay $189 million of debt in fiscal In fiscal 2005, we commenced a cash tender offer for our outstanding 6 percent notes due in The tender offer resulted in the purchase of $500 million principal amount of the notes. Subsequent to the expiration of the tender offer, we purchased an additional $260 million principal amount of the notes in the open market. We incurred a loss of $137 million from this repurchase. In fiscal 2007, our Board of Directors approved a new authorization to repurchase up to 75 million shares of our common stock. This replaced a prior authorization, which permitted us to repurchase shares up to a treasury share balance of 170 million. Purchases under the new authorization can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans, and accelerated repurchase programs. The authorization has no specified termination date. During fiscal 2007, we repurchased 25 million shares for an aggregate purchase price of $1,385 million, of which $64 million settled after the end of our fiscal year. Under the prior authorization in fiscal 2006, we repurchased 19 million shares of common stock for an aggregate purchase price of $892 million. A total of 162 million shares were held in treasury on May 27, 2007.

40 38 Dividends paid in fiscal 2007 totaled $506 million, or $1.44 per share, a 7.5 percent increase from fiscal 2006 dividends of $1.34 per share. Dividends paid in fiscal 2006 totaled $485 million, or $1.34 per share, an 8 percent increase from fiscal 2005 dividends of $1.24 per share. Our Board of Directors approved a quarterly dividend increase from $0.37 per share to $0.39 per share effective with the dividend payable on August 1, CAPITAL RESOURCES Capital Structure May 27, 2007 May 28, 2006 In Millions Notes payable $ 1,254 $ 1,503 Current portion of long-term debt 1,734 2,131 Long-term debt 3,218 2,415 Total debt 6,206 6,049 Minority interests 1,139 1,136 Stockholders equity 5,319 5,772 Total Capital $12,664 $12,957 The following table details the fee-paid committed credit lines we had available as of May 27, 2007: In Billions Amount Credit facility expiring: October 2007 $1.10 January October Total Committed Credit Facilities $2.95 Commercial paper is a continuing source of short-term financing. We can issue commercial paper in the United States, Canada, and Europe. Our commercial paper borrowings are supported by $2.95 billion of fee-paid committed credit lines and $351 million in uncommitted lines. As of May 27, 2007, there were no amounts outstanding on the fee-paid committed credit lines and $133 million was drawn on the uncommitted lines, all by our international operations. Our credit facilities, certain of our long-term debt agreements, and our minority interests contain restrictive covenants. As of May 27, 2007, we were in compliance with all of these covenants. We have $1.7 billion of long-term debt maturing in the next 12 months that is classified as current, including $1.25 billion of notes that may mature based on the put rights of the note holders. We believe that cash flows from operations, together with available short- and long-term debt financing, will be adequate to meet our liquidity and capital needs for at least the next 12 months. As of May 27, 2007, our total debt, including the impact of derivative instruments designated as hedges, was 50 percent each in fixed-rate and floating-rate instruments compared to 63 percent fixed-rate and 37 percent floatingrate as of May 28, The change in the fixed-rate and floating-rate percentages were driven by refinancing our fixed-rate zero coupon convertible debentures in April 2007 with commercial paper and also refinancing $500 million of fixed rate notes that matured in February 2007 with floating rate notes. We have an effective shelf registration statement on file with the Securities and Exchange Commission (SEC) covering the sale of debt securities, common stock, preference stock, depository shares, securities warrants, purchase contracts, purchase units, and units. As of May 27, 2007, $3.7 billion remained available under the shelf registration for future use. We believe that growth in return on average total capital is a key performance measure. Return on average total capital increased from 10.5 percent in fiscal 2006 to 11.1 percent in fiscal 2007 due to earnings growth and disciplined use of cash. We also believe important measures of financial strength are the ratio of fixed charge coverage and the ratio of operating cash flow to debt. Our fixed charge coverage ratio in fiscal 2007 was 4.37 compared to 4.54 in fiscal The measure declined from fiscal 2006 as a $72 million increase in earnings before income taxes and after-tax earnings from joint ventures was more than offset by the impact of a $32 million decrease in distributions of earnings from joint ventures and a $35 million increase in fixed charges. Our operating cash flow to debt ratio decreased to 28 percent in fiscal 2007 from 31 percent in fiscal 2006, as cash flows from operations declined slightly from fiscal 2006 and year end debt balances increased slightly over the same period. Currently, Standard and Poor s (S&P) has ratings of BBB+ on our publicly held long-term debt and A-2 on our commercial paper. Moody s Investors Services (Moody s) has ratings of Baa1 for our long-term debt and P-2 for our commercial paper. Fitch Ratings (Fitch) rates our long-term debt BBB+ and our commercial paper F-2. Dominion Bond Rating Service in Canada currently rates us as A-low. These ratings are not a recommendation to buy, sell or hold securities, are subject to revision or withdrawal at any time by the rating organization and should be evaluated independently of any other rating. We intend to maintain these ratings levels for the foreseeable future. Third parties hold minority interests in certain of our subsidiaries. General Mills Cereals, LLC (GMC) owns the manufacturing assets and intellectual property associated with the production and retail sale of Big G ready-to-eat cereals, Progresso soups and Old El Paso products. In May 2002, we sold 150,000 Class A preferred membership interests in GMC to an unrelated third-party investor in exchange for $150 million. In June 2007, we sold an additional 88,851 Class A preferred membership interests in GMC to the same

41 39 unrelated third-party investor in exchange for $92 million. In October 2004, we sold 835,000 Series B-1 preferred membership interests in GMC to an unrelated third-party investor in exchange for $835 million. The terms of the Series B-1 and Class A interests held by the third-party investors and the rights of those investors are detailed in the Third Amended and Restated Limited Liability Company Agreement of GMC (the LLC Agreement). Currently, we hold all interests in GMC (including all managing member interests), other than the Class A interests and the Series B-1 interests. The Class A interests receive quarterly preferred distributions based on their capital account balance at a floating rate equal to the sum of three-month LIBOR plus 65 basis points. The rate of the distributions on the Class A interests must be adjusted by agreement between the Class A interest holder and GMC, or through a remarketing, every five years. The first adjustment of the rate occurred in June 2007 and the next adjustment is scheduled to occur in July GMC, through its managing member, may elect to repurchase all of the Class A interests at any time for an amount equal to the holder s capital account, plus any unpaid preferred returns and any applicable make-whole amount. Upon a failed remarketing, the rate over LIBOR will be increased by 75 basis points until the next scheduled remarketing, which will occur in 3 month intervals until a successful remarketing. As of May 27, 2007, the capital account balance of the Class A interests held by the unrelated third party was $150 million, and it was $248 million as of June 28, 2007, reflecting the third party s purchase of $92 million of additional Class A interests and a $6 million increase in the capital account balance associated with the previously owned interests. The Series B-1 interests of GMC are entitled to receive quarterly preferred distributions based on their capital account balance at a fixed rate of 4.5 percent per year, which is scheduled to be reset to a new fixed rate through a remarketing in August The capital account balance of the Series B-1 interests was $835 million as of May 27, 2007, and will be increased to $849 million in August 2007 in connection with the remarketing. Beginning in August 2012, we may elect to reset the preferred distribution rate through a remarketing or to repurchase the interests. If we do not conduct a remarketing or repurchase the interests, the preferred distribution rate will be reset to a floating rate. As the managing member of GMC, we may elect to repurchase the Series B-1 interests for an amount equal to the holder s then current capital account balance (i) in August 2007 and in five year intervals thereafter, and (ii) on any distribution date during a period in which the preferred return is set at a floating rate. The holders of the Series B-1 interests cannot require us to repurchase the interests. The Series B-1 interests will be exchanged for shares of our perpetual preferred stock as a result of: our senior unsecured debt rating falling below either Ba3 as rated by Moody s or BB- as rated by S&P or Fitch; our bankruptcy or liquidation; a default on any of our senior indebtedness resulting in an acceleration of indebtedness having an outstanding principal balance in excess of $50 million; failing to pay a dividend on our common stock in any fiscal quarter; or certain liquidating events described in the LLC Agreement. If GMC fails to make a required distribution to the holders of Series B-1 interests when due, we will be restricted from paying any dividend (other than dividends in the form of shares of common stock) or other distributions on shares of our common or preferred stock, and may not repurchase or redeem shares of our common or preferred stock, until all such accrued and undistributed distributions are paid to the holders of the Series B-1 interests. GMC may be required to be dissolved and liquidated under certain circumstances, including: the bankruptcy of GMC or its subsidiaries; GMC s failure to deliver the preferred distributions; GMC s failure to comply with portfolio requirements; breaches of certain covenants; lowering of our senior debt rating below either Baa3 by Moody s or BBB by S&P; and a failed attempt to remarket the Class A interests as a result of a breach of GMC s obligations to assist in such remarketing. In the event of a liquidation of GMC, each member of GMC would receive the amount of its then current capital account balance. As managing member, we may avoid liquidation of GMC in most circumstances by exercising our option to purchase the Class A interests. General Mills Capital, Inc. (GM Capital) was formed for the purpose of purchasing and collecting our receivables and previously sold $150 million of its Series A preferred stock to an unrelated third-party investor. In June 2007, we repurchased all of the Series A preferred stock. We used commercial paper borrowings and proceeds from the sale of the additional interests in GMC to fund the repurchase. In October 2004, Lehman Brothers Holdings, Inc. (Lehman Brothers) issued $750 million of notes that are mandatorily exchangeable for shares of our common stock. In connection with the issuance of those notes, an affiliate of Lehman Brothers entered into a forward purchase contract with us, under which we are obligated to deliver between 14 million and 17 million shares of our common stock, subject to adjustment under certain circumstances. These shares will be deliverable by us in October 2007 in exchange for $750 million of cash, assuming the Series B-1 interests in GMC are remarketed as planned in August If the remarketing is not successful, we will receive securities of an affiliate of Lehman Brothers. We expect to use the cash we receive from Lehman Brothers to repurchase shares of our stock, or to the

42 40 extent we have already reached our share repurchase objective for the year, to retire outstanding debt. For financial reporting purposes, the assets, liabilities, results of operations, and cash flows of GMC and GM Capital are included in our Consolidated Financial Statements. The return to the third party investors is reflected in interest, net in the Consolidated Statements of Earnings. The third party investors Class A and Series B-1 interests in GMC are classified as minority interests on our Consolidated Balance Sheets. We may also call these instruments in exchange for a payment equal to the then-current capital account value, plus any unpaid preferred return and any applicable make-whole amount. We may only call the Series B-1 interests in connection with a remarketing or on distribution dates in the event of a floating rate period. If we repurchase these interests, any change in the unrelated third party investors capital accounts from their original value will be charged directly to retained earnings and will increase or decrease the net earnings used to calculate EPS in that period. See Note 9 to the Consolidated Financial Statements on pages 71 and 72 for more information regarding our minority interests. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As of May 27, 2007, we have issued guarantees and comfort letters of $606 million for the debt and other obligations of consolidated subsidiaries, and guarantees and comfort letters of $266 million for the debt and other obligations of non-consolidated affiliates, primarily CPW. In addition, off-balance sheet arrangements are generally limited to the future payments under noncancelable operating leases, which totaled $279 million as of May 27, As of May 27, 2007, we had invested in 5 VIEs. We are the PB of GM Capital, a subsidiary that we consolidate. As discussed previously, in June 2007 we repurchased its outstanding securities. We have an interest in a contract manufacturer at our former facility in Geneva, Illinois. We are the PB and have consolidated this entity as of May 27, This entity had property and equipment with a fair value of $37 million and long-term debt of $37 million as of May 27, We also have an interest in a contract manufacturer in Greece that is a VIE. Although we are the PB, we have not consolidated this entity because it is not material to our results of operations, financial condition, or liquidity as of May 27, This entity had assets of $3 million and liabilities of $1 million as of May 27, We are not the PB of the remaining 2 VIEs. Following our repurchase of the GM Capital preferred stock, our maximum exposure to loss from the remaining 4 VIEs is limited to the $37 million of long-term debt of the contract manufacturer in Geneva, Illinois and our $3 million equity investments in two of the other VIEs. On August 17, 2006, the Pension Protection Act (PPA) became law in the United States. The PPA revised the basis and methodology for determining defined benefit plan minimum funding requirements as well as maximum contributions to and benefits paid from tax-qualified plans. Most of these provisions are first applicable to our domestic defined benefit pension plans in fiscal 2008 on a phased-in basis. The PPA may ultimately require us to make additional contributions to our domestic plans. However, due to our historical funding practices and current funded status, we do not expect to have significant statutory or contractual funding requirements for our major defined benefit plans during the next several years. No 2008 domestic plan contributions are currently expected. Actual 2008 contributions could exceed our current projections, and may be influenced by our decision to undertake discretionary funding of our benefit trusts versus other competing investment priorities, or by future changes in government requirements. Additionally, our projections concerning timing of the PPA funding requirements are subject to change and may be influenced by factors such as general market conditions affecting trust asset performance, interest rates and our future decisions regarding certain elective provisions of the PPA. The following table summarizes our future estimated cash payments under existing contractual obligations, including payments due by period. Payments Due by Fiscal Year In Millions Total and Thereafter Long-term debt (a) $4,942 $1,728 $ 818 $1,252 $1,144 Accrued interest Operating leases Capital leases Purchase obligations 2,403 2, Total $7,817 $4,123 $1,095 $1,374 $1,225 (a) Excludes $23 million related to capital leases and $13 million of bond premium and dealer discount. Principal payments due on long-term debt are based on stated contractual maturities or put rights of certain note holders. The majority of the purchase obligations represent commitments for raw material and packaging to be utilized in the normal course of business and for consumer marketing spending commitments that support our brands. The fair value of our interest rate and equity swaps was a payable of $154 million as of May 27, 2007, based on fair market values as of that date. Future changes in market values will impact the amount of cash ultimately paid or received to settle those instruments in the future. Other long-term obligations

43 41 primarily consist of liabilities for uncertain income tax positions, accrued compensation and benefits, including the underfunded status of certain of our defined benefit pension, other postretirement benefit, and postemployment benefit plans, and miscellaneous liabilities. We expect to pay $24 million of benefits from our unfunded postemployment benefit plans in fiscal Further information on all of these plans is included in Note 13 to the Consolidated Financial Statements appearing on pages 76 through 80 of this report. SIGNIFICANT ACCOUNTING ESTIMATES For a complete description of our significant accounting policies, see Note 2 to the Consolidated Financial Statements appearing on pages 58 through 62 of this report. Our significant accounting estimates are those that have meaningful impact on the reporting of our financial condition and results of operations. These policies include our accounting for promotional expenditures, intangible assets, stock compensation, income taxes, and defined benefit pension, other postretirement and postemployment benefits. PROMOTIONAL EXPENDITURES Our promotional activities are conducted through our customers and directly or indirectly with end consumers. These activities include: payments to customers to perform merchandising activities on our behalf, such as advertising or in-store displays; discounts to our list prices to lower retail shelf prices and payments to gain distribution of new products; coupons, contests, and other incentives; and media and advertising expenditures. The media and advertising expenditures are recognized as expense when the advertisement airs. The cost of payments to customers and other consumer activities are recognized as the related revenue is recorded, which generally precedes the actual cash expenditure. The recognition of these costs requires estimation of customer participation and performance levels. These estimates are made based on the forecasted customer sales, the timing and forecasted costs of promotional activities, and other factors. Differences between estimated expenses and actual costs are normally insignificant and are recognized as a change in management estimate in a subsequent period. Our accrued trade, coupon, and brand-building consumer marketing liabilities were $289 million as of May 27, 2007, and $294 million as of May 28, Because our total promotional expenditures (including amounts classified as a reduction of revenues) are significant, if our estimates are inaccurate we would have to make adjustments that could have a material effect on our results of operations. Our unit volume in the last week of a quarter can be higher than the average for the preceding weeks of the quarter in certain circumstances. In comparison to the average daily shipments in the first 12 weeks of a quarter, the final week of each quarter may have as much as two to four days worth of incremental shipments (based on a five-day week), reflecting increased promotional activity at the end of the quarter. This increased activity includes promotions to assure that our customers have sufficient inventory on hand to support major marketing events or increased seasonal demand early in the next quarter, as well as promotions intended to help achieve interim unit volume targets. If, due to quarter-end promotions or other reasons, our customers purchase more product in any reporting period than end-consumer demand will require in future periods, our sales level in future reporting periods could be adversely affected. INTANGIBLE ASSETS Goodwill represents the difference between the purchase price of acquired companies and the related fair values of net assets acquired. Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Impairment testing is performed for each of our reporting units. We compare the carrying value of a reporting unit, including goodwill, to the fair value of the unit. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. If the carrying amount of a reporting unit exceeds its fair value, we revalue all assets and liabilities of the reporting unit, excluding goodwill, to determine if the fair value of the net assets is greater than the net assets including goodwill. If the fair value of the net assets is less than the net assets including goodwill, impairment has occurred. Our estimates of fair value are determined based on a discounted cash flow model. Growth rates for sales and profits are determined using inputs from our annual longrange planning process. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors. We periodically engage third-party valuation consultants to assist in this process. During fiscal 2007, we changed the timing of our annual goodwill impairment testing from the first day of our fiscal year to December 1. This accounting change is preferable because it better aligns this impairment test with the timing of the presentation of our strategic long-range plan to the Board of Directors. During fiscal 2007, we performed this annual impairment test on May 29, 2006, and again on December 1, The fair values for all of our reporting units exceed their carrying values by at least 20 percent. We evaluate the useful lives of our other intangible assets, primarily intangible assets associated with the Pillsbury, Totino s, Progresso, Green Giant, Old El Paso and Häagen- Dazs brands, to determine if they are finite or indefinitelived. Reaching a determination on useful life requires

44 42 significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets. Our indefinite-lived intangible assets, primarily brands, are also tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We performed our fiscal 2007 assessment of our brand intangibles as of December 1, Our estimate of the fair value of the brands was based on a discounted cash flow model using inputs which included: projected revenues from our annual long-range plan; assumed royalty rates that could be payable if we did not own the brands; and a discount rate. We periodically engage thirdparty valuation consultants to assist in this process. All brand intangibles had fair values in excess of their carrying values by at least 20 percent, except for the Pillsbury brand, which we estimated had a fair value less than 3 percent higher than its carrying value. This brand comprises nearly one-half of our total indefinite-lived intangible assets. If the growth rate for the global revenue from all uses of the Pillsbury brand decreases 50 basis points from the current planned growth rate, fair value would be reduced by approximately $165 million, assuming all other components of the fair value estimate remain unchanged. If the assumed royalty rate for all uses of the Pillsbury brand decreases by 50 basis points, fair value would be reduced by approximately $130 million, assuming all other components of the fair value estimate remain unchanged. If the applicable discount rate increases by 50 basis points, fair value of the Pillsbury brand would be reduced by approximately $175 million, assuming all other components of the fair value estimate remain unchanged. As of May 27, 2007, we reviewed each of the assumptions used in the annual impairment assessment performed as of December 1, 2006, and found them to still be appropriate. As of May 27, 2007, we had $10.5 billion of goodwill and indefinite-lived intangible assets. While we currently believe that the fair value of each intangible exceeds its carrying value and that those intangibles so classified will contribute indefinitely to our cash flows, materially different assumptions regarding future performance of our businesses could result in significant impairment losses and amortization expense. STOCK COMPENSATION Effective May 29, 2006, we adopted SFAS 123R, which changed the accounting for compensation expense associated with stock options, restricted stock awards, and other forms of equity compensation. We elected the modified prospective transition method as permitted by SFAS 123R; accordingly, results from prior periods have not been restated. Under this method, stock-based compensation expense for fiscal 2007 was $128 million, which included amortization related to the remaining unvested portion of all equity compensation awards granted prior to May 29, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and amortization related to all equity compensation awards granted on or subsequent to May 29, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The incremental effect on net earnings in fiscal 2007 of our adoption of SFAS 123R was $69 million of expense ($43 million aftertax). All our stock compensation expense is recorded in SG&A expense in the Consolidated Statement of Earnings. Prior to May 29, 2006, we used the intrinsic value method for measuring the cost of compensation paid in our common stock. No compensation expense for stock options was recognized in our Consolidated Statements of Earnings prior to fiscal 2007, as the exercise price was equal to the market price of our stock at the date of grant. Expense attributable to other types of share-based awards was recognized in our results under SFAS 123. The weighted-average grant-date fair values of the employee stock options granted were estimated as $10.74 in fiscal 2007, $8.04 in fiscal 2006, and $8.32 in fiscal 2005 using the Black-Scholes option-pricing model with the following assumptions: Fiscal Year Risk-free interest rate 5.3% 4.3% 4.0% Expected term 8 years 7 years 7 years Expected volatility 19.7% 20.0% 21.0% Dividend yield 2.8% 2.9% 2.7% The valuation of stock options is a significant accounting estimate which requires us to use significant judgments and assumptions that are likely to have a material impact on our financial statements. Annually, we make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. Our methods for selecting these valuation assumptions are explained in Note 11 to the Consolidated Financial Statements on pages 73 through 75 of this report. For fiscal 2007 and all prior periods, our estimate of expected stock price volatility is based on historical volatility determined on a daily basis over the expected term of the options. We considered but did not use implied volatility because we believed historical volatility provided an appropriate expectation for our volatility in the future. If all other assumptions are held constant, a one percentage point increase or decrease in our fiscal 2007 volatility assumption

45 43 would increase or decrease the grant-date fair value of our fiscal 2007 option awards by 4 percent. For our fiscal 2008 annual option grant made in June 2007, we have included implied volatility in our determination of expected volatility. We have weighted implied volatility and historical volatility equally in determining our volatility assumption. We have included implied volatility in our determination of this assumption because exchange-traded options on our stock are widely traded, and we believe the implied volatility placed on our stock by the marketplace is a reasonable indicator of expected future volatility in our stock price. We have more heavily weighted the last several years of historical volatility data to reflect a significant decrease in both our historical and our implied volatility trends following our completion of the Pillsbury acquisition in October 2001 and our operating results thereafter. Our expected term represents the period of time that options granted are expected to be outstanding based on historical data to estimate option exercise and employee termination within the valuation model. Separate groups of employees have similar historical exercise behavior and therefore were aggregated into a single pool for valuation purposes. The weighted-average expected term for all employee groups is presented in the table above. A change in the expected term of 1 year, leaving all other assumptions constant, would not change the grant date fair value by more than 3 percent. Our valuation model assumes that dividends and our share price increase in line with earnings, resulting in a constant dividend yield. The risk-free interest rate for periods during the expected term of the options is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant. To the extent that actual outcomes differ from our assumptions, we are not required to true up grant-date fair value-based expense to final intrinsic values. However, these differences can impact the classification of cash tax benefits realized upon exercise of stock options, as explained in the following two paragraphs. Furthermore, historical data has a significant bearing on our forward-looking assumptions. Significant variances between actual and predicted experience could lead to prospective revisions in our assumptions, which could then significantly impact the year-over-year comparability of stock-based compensation expense. SFAS 123R also provides that any corporate income tax benefit realized upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a windfall tax benefit ) is presented in the Consolidated Statement of Cash Flows as a financing (rather than an operating) cash flow. If this standard had been adopted in fiscal 2006, operating cash flow would have been lower (and financing cash flow would have been higher) by $41 million as a result of this provision. For fiscal 2007, the windfall tax benefits classified as financing cash flow were $73 million. The actual impact on future years financing cash flow will depend, in part, on the volume of employee stock option exercises during a particular year and the relationship between the exercisedate market value of the underlying stock and the original grant-date fair value previously determined for financial reporting purposes. For balance sheet classification purposes, realized windfall tax benefits are credited to additional paid-in capital within the Consolidated Balance Sheet. Realized shortfall tax benefits (amounts which are less than that previously recognized in earnings) are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense, potentially resulting in volatility in our consolidated effective income tax rate. Under the transition rules for adopting SFAS 123R using the modified prospective method, we were permitted to calculate a cumulative amount of windfall tax benefits from post-1995 fiscal years for the purpose of accounting for future shortfall tax benefits. We completed such study prior to the first period of adoption and currently have sufficient cumulative windfall tax benefits to absorb projected arising shortfalls, such that we do not currently expect fiscal 2008 earnings to be affected by this provision. However, as employee stock option exercise behavior is not within our control, it is possible that materially different reported results could occur if different assumptions or conditions were to prevail. INCOME TAXES Our consolidated effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we operate. Management judgment is involved in determining our effective tax rate and in evaluating the ultimate resolution of any uncertain tax positions. We are periodically under examination or engaged in a tax controversy. We establish reserves in a variety of taxing jurisdictions when, despite our belief that our tax return positions are supportable, we believe that certain positions may be challenged and may need to be revised. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective income tax rate includes the impact of reserve provisions and changes to those reserves. We also provide interest on these reserves at the appropriate statutory interest rate. These interest charges are also included in our effective tax rate. As of May 27, 2007, our income tax and related interest reserves recorded in other current liabilities were slightly more than $700 million. Reserve adjustments for individual issues have generally not exceeded 1 percent of earnings before income taxes and after-tax earnings from joint ventures annually. Nevertheless, the accumulation of individually insignificant discrete adjustments throughout a particular year has historically impacted our consolidated effective income tax rate by up to 80 basis points.

46 44 The Internal Revenue Service (IRS) recently concluded field examinations for our 2002 and 2003 federal tax years. These examinations included review of our determinations of cost basis, capital losses, and the depreciation of tangible assets and amortization of intangible assets arising from our acquisition of Pillsbury and the sale of minority interests in our GMC subsidiary. The IRS has proposed adjustments related to a majority of the tax benefits associated with these items. We believe we have meritorious defenses and intend to vigorously defend our positions. Our potential liability for this matter is significant and, notwithstanding our reserves against this potential liability, an unfavorable resolution could have a material adverse impact on our results of operations or cash flows from operations. DEFINED BENEFIT PENSION, OTHER POSTRETIREMENT, AND POSTEMPLOYMENT BENEFIT PLANS We have defined benefit pension plans covering most domestic, Canadian, and United Kingdom employees. Benefits for salaried employees are based on length of service and final average compensation. Benefits for hourly employees include various monthly amounts for each year of credited service. Our funding policy is consistent with the requirements of applicable laws. We made $11 million of voluntary contributions to these plans in fiscal Our principal domestic retirement plan covering salaried employees has a provision that any excess pension assets would vest if the plan is terminated within five years of a change in control. We also sponsor plans that provide health care benefits to the majority of our domestic and Canadian retirees. The salaried health care benefit plan is contributory, with retiree contributions based on years of service. We fund related trusts for certain employees and retirees on an annual basis and made $50 million of voluntary contributions to these plans in fiscal Under certain circumstances, we also provide accruable benefits to former or inactive employees in the United States and Canada and members of our Board of Directors, including severance, long-term disability, and certain other benefits payable upon death. We recognize an obligation for any of these benefits that vest or accumulate with service. Postemployment benefits that do not vest or accumulate with service (such as severance based solely on annual pay rather than years of service) are charged to expense when incurred. Our postemployment benefit plans are unfunded. We account for our defined benefit pension, other postretirement, and postemployment benefit plans in accordance with SFAS No. 87, Employers Accounting for Pensions, SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions, and SFAS No. 112, Employers Accounting for Postemployment Benefits An Amendment of FASB Statements No. 5 and 43, in measuring plan assets and benefit obligations and in determining the amount of net periodic benefit cost, and SFAS 158, which was issued in September 2006 and is effective for us as of May 27, SFAS 158 requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability and recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income (loss), which is a component of stockholders equity. As a result of the implementation of SFAS 158, we recognized an after-tax decrease in accumulated other comprehensive income (loss) of $440 million for all of our defined benefit pension, other postretirement, and postemployment benefit plans. This includes the incremental impact of recognizing our share of the underfunded status of CPW s defined benefit pension plan in the United Kingdom. Prior periods were not restated. We recognize benefits provided during retirement or following employment over the plan participants active working life. Accordingly, we make various assumptions to predict and measure costs and obligations many years prior to the settlement of our obligations. Assumptions that require significant management judgment and have a material impact on the measurement of our net periodic benefit expense or income and accumulated benefit obligations include the long-term rates of return on plan assets, the interest rates used to discount the obligations for our benefit plans, and the health care cost trend rates. Expected Rate of Return on Plan Assets Our expected rate of return on plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment services, and investment managers), and long-term inflation assumptions. We review this assumption annually for each plan, however, our annual investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return are revised only when our future investment performance based on our asset allocations, investment strategies, or capital markets change significantly. The investment objective for our defined benefit pension and other postretirement benefit plans is to secure the benefit obligations to participants at a reasonable cost to us. Our goal is to optimize the long-term return on plan assets at a moderate level of risk. The defined benefit pension and other postretirement portfolios are broadly diversified across asset classes. Within asset classes, the portfolios are further diversified across investment styles and investment organizations. For the defined benefit pension and other postretirement benefit plans, the long-term investment policy allocations are: 30 percent to equities in the United States; 20 percent to international equities; 10 percent to private equities; 30

47 45 percent to fixed income; and 10 percent to real assets (real estate, energy and timber). The actual allocations to these asset classes may vary tactically around the long-term policy allocations based on relative market valuations. Our historical investment returns (compound annual growth rates) for our United States defined benefit pension and other postretirement plan assets were 18 percent, 14 percent, 11 percent, 12 percent, and 12 percent for the 1, 5, 10, 15, and 20 year periods ended May 27, For fiscal 2007, we assumed, on a weighted-average basis for all defined benefit plans, a rate of return of 9.4 percent. For fiscal 2006 and 2005, we assumed, on a weighted-average basis for all defined benefit plan assets, a rate of return of 9.6 percent. Our principal defined benefit pension and other postretirement plans in the United States have an expected return on plan assets of 9.6 percent. During fiscal 2007, we lowered the expected rate of return on one of our other postretirement plans in the United States based on costs associated with insurance contracts owned by that plan. Lowering the expected long-term rate of return on assets by 50 basis points would increase our net pension and postretirement expense by $20 million for fiscal A 50 basis point shortfall between the assumed and actual rate of return on plan assets for fiscal 2008 would result in a similar amount of arising asset-experience loss. Any arising assetexperience loss is recognized on a market-related valuation basis, which reduces year-to-year volatility. This marketrelated valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the marketrelated value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded. Our outside actuaries perform these calculations as part of our determination of annual expense or income. Discount Rates Our discount rate assumptions are determined annually as of the last day of our fiscal year for all of our defined benefit pension, other postretirement, and postemployment benefit plan obligations. Those same discount rates also are used to determine defined benefit pension, other postretirement, and postemployment benefit plan income and expense for the following fiscal year. We work with our actuaries to determine the timing and amount of expected future cash outflows to plan participants and, using AA-rated corporate bond yields, to develop a forward interest rate curve, including a margin to that index based on our credit risk. This forward interest rate curve is applied to our expected future cash outflows to determine our discount rate assumptions. Our weighted-average discount rates were as follows: Weighted-Average Discount Rates Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans ObligationasofMay27, 2007, and fiscal 2008 expense 6.18% 6.15% 6.05% ObligationasofMay28, 2006, and fiscal 2007 expense 6.45% 6.50% 6.44% Fiscal 2006 expense 5.55% 5.50% 5.55% Lowering the discount rates by 50 basis points would increase our net defined benefit pension, other postretirement, and postemployment benefit plan expense for fiscal 2008 by approximately $28 million. All obligation-related experience gains and losses are amortized using a straightline method over the average remaining service period of active plan participants. Health Care Cost Trend Rates We review our health care trend rates annually. Our review is based on data and information we collect about our health care claims experience and information provided by our actuaries. This information includes recent plan experience, plan design, overall industry experience and projections, and assumptions used by other similar organizations. Our initial health care cost trend rate is adjusted as necessary to remain consistent with this review, recent experiences, and short-term expectations. Our current health care cost trend rate assumption is 11 percent for retirees age 65 and over and 10 percent for retirees under age 65. These rates are graded down annually until the ultimate trend rate of 5.2 percent is reached in 2015 for retirees over age 65 and 2014 for retirees under age 65. The trend rates are applicable for calculations only if the retirees benefits increase as a result of health care inflation. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of longterm inflation plus an appropriate health care cost premium. Assumed trend rates for health care costs have an important effect on the amounts reported for the other postretirement benefit plans.

48 46 A one percentage point change in the health care cost trend rate would have the following effects: One Percentage Point Increase One Percentage Point Decrease In Millions Effect on the aggregate of the service and interest cost components in fiscal 2008 $ 7 $ (7) Effect on the other postretirement accumulated benefit obligation as of May 27, (78) Any arising health care claims cost-related experience gain or loss is recognized in the calculation of expected future claims. Once recognized, experience gains and losses are amortized using a straight-line method over 15 years, resulting in at least the minimum amortization required being recorded. Financial Statement Impact In fiscal 2007, we recorded net defined benefit pension, other postretirement, and postemployment benefit plan expense of $36 million compared to $25 million in fiscal 2006 and $6 million in fiscal As of May 27, 2007, we had cumulative unrecognized actuarial net losses of $407 million on our pension plans, $269 million on our other postretirement benefit plans, and $2 million on our postemployment benefit plans, primarily as the result of decreases in our discount rate assumptions. These unrecognized actuarial net losses will result in decreases in our future pension income and increases in postretirement expense since they currently exceed the corridors defined by GAAP. As of May 27, 2007, we changed to the Retirement Plans (RP) 2000 Mortality Table projected forward to 2007 for calculating the fiscal 2007 year end defined benefit pension, other postretirement, and postemployment benefit obligations and fiscal 2008 expense. The impact of this change increased our defined benefit pension obligations by $2 million and had no impact on any of our other plans. The change also increased fiscal 2008 defined benefit pension expenses by $1 million. Actual future net defined benefit pension, other postretirement, and postemployment benefit plan income or expense will depend on investment performance, changes in future discount rates, changes in health care trend rates, and various other factors related to the populations participating in these plans. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In the first quarter of fiscal 2008, we will adopt Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Among other things, FIN 48 requires application of a more likely than not threshold to the recognition and derecognition of tax positions. For the periods presented, our policy was to establish reserves that reflected the probable outcome of known tax contingencies. Favorable resolution was recognized as a reduction to our effective tax rate in the period of resolution. As compared to a contingency approach, FIN 48 is based on a benefit recognition model, which we believe could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, FIN 48 permits a company to recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. The tax position must be derecognized when it is no longer more likely than not of being sustained. It further requires that a change in judgment related to prior years tax positions be recognized in the quarter of such change. We anticipate $705 million of our accrued income taxes will be reclassified as long-term liabilities upon adoption. Significant tax reserve adjustments impacting our effective tax rate would be separately presented in the rate reconciliation table of Note 14 to the Consolidated Financial Statements appearing on pages 80 and 81 of this report. We are currently evaluating the impact of adopting FIN 48. In June 2007, the FASB approved the issuance of Emerging Issues Task Force Issue No Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). EITF requires that tax benefits from dividends paid on unvested restricted shares be charged directly to stockholders equity instead of benefiting income tax expense. EITF 06-11, which will be effective for us in the first quarter of fiscal 2009, is expected to increase our effective income tax rate by 20 basis points, or from 34.3 percent to 34.5 percent based on our actual 2007 effective tax rate. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of SFAS No. 115 (SFAS 159). This statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement is effective for fiscal years beginning after November 15, 2007, which for us is the first quarter of fiscal We do not believe that the adoption of SFAS 159 will have a material impact on our results of operations or financial condition.

49 47 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS 123R and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007, which for us is the first quarter of fiscal We are evaluating the impact of SFAS 157 on our results of operations and financial condition. In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on the process and diversity in practice of quantifying financial statement misstatements resulting in the potential carryover of improper amounts on the balance sheet. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for us in the first quarter of fiscal We do not believe that the adoption of SAB 108 will have a material impact on our results of operations or financial condition. measure to operating profit, the relevant GAAP measure, is included in Note 16 to the Consolidated Financial Statements included on pages 82 and 83 of this report. ONGOING JOINT VENTURES Our interest in SVE was redeemed in February To view the performance of our joint ventures on an ongoing basis, we have provided certain information excluding SVE. The reconciliation of this non-gaap measure is shown in the following tables: In Millions, Fiscal Year After-tax earnings from joint ventures: As reported $ 73 $ 69 $ 94 Less: SVE (28) Ongoing joint ventures $ 73 $ 69 $ 66 Net sales of joint ventures (100% basis): As reported $2,016 $1,796 $2,652 Less: SVE (896) Ongoing joint ventures $2,016 $1,796 $1, vs vs Fiscal Year Change in net sales of joint ventures (100% basis): As reported +13% 32% Ongoing joint ventures +13% +2% NON-GAAP MEASURES We have included in this report measures of financial performance that are not defined by GAAP. For each of these non-gaap financial measures, we are providing below a reconciliation of the differences between the non-gaap measure and the most directly comparable GAAP measure, an explanation of why our management or the Board of Directors believes the non-gaap measure provides useful information to investors, and any additional purposes for which our management or Board of Directors uses the non-gaap measure. These non-gaap measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure. TOTAL SEGMENT OPERATING PROFIT This non- GAAP measure is used in reporting to our executive management and as a component of the Board of Directors measurement of our performance for incentive compensation purposes. Management and the Board of Directors believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate segment performance. A reconciliation of this

50 48 RETURN ON AVERAGE TOTAL CAPITAL This ratio is not defined by GAAP, and is used in internal management reporting and as a component of the Board of Directors rating of our performance for management and employee incentive compensation. Management and the Board of Directors believe that this measure provides useful information to investors because it is important for assessing the utilization of capital. Dollars In Millions, Fiscal Year Net earnings $ 1,144 $ 1,090 $ 1,240 $ 1,055 $ 917 Interest, net, after-tax Earnings before interest, after-tax $ 1,425 $ 1,351 $ 1,529 $ 1,385 $ 1,295 Current portion of long-term debt $ 1,734 $ 2,131 $ 1,638 $ 233 $ 105 $ 248 Notes payable 1,254 1, ,236 3,600 Long-term debt 3,218 2,415 4,255 7,410 7,516 5,591 Total debt 6,206 6,049 6,192 8,226 8,857 9,439 Minority interests 1,139 1,136 1, Stockholders equity 5,319 5,772 5,676 5,248 4,175 3,576 Total capital 12,664 12,957 13,001 13,773 13,332 13,168 Less: Accumulated other comprehensive (income) loss 120 (125) (8) Adjusted total capital $12,784 $12,832 $12,993 $13,917 $13,674 $13,544 Adjusted average total capital $12,808 $12,913 $13,455 $13,796 $13,609 Return on average total capital 11.1% 10.5% 11.4% 10.0% 9.5% PROPORTIONATE SHARE OF JOINT VENTURE NET SALES This non-gaap measure is used to report our worldwide results including the proportionate share of joint venture net sales. We believe this measure is important as it enables us to better compare our results with other worldwide companies. A reconciliation of this non-gaap measure is shown in the following tables: In Millions, Fiscal Year 2007 General Mills Worldwide Net Sales: Net sales, as reported $12,442 Proportionate share of joint venture net sales 1,007 Worldwide net sales $13,449 In Millions, Fiscal Year International Net Sales: International operating segment net sales, as reported $2,124 $1,837 $1,725 $1,550 $1,300 Proportionate share of joint venture net sales International net sales $3,109 $2,710 $2,584 $2,322 $1,939 Dollars In Millions, Fiscal Year vs Cereal Business Net Sales: Net sales of cereal businesses in U.S Retail, International, and Bakeries and Foodservice operating segments $2,290 $2,239 2% Proportionate share of joint venture net sales % Worldwide cereal net sales $3,076 $2,904 6% CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains or incorporates by reference forwardlooking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and assumptions. We also may make written or oral forward-looking statements, including statements contained in our filings with the SEC and in our reports to stockholders. The words or phrases will likely result, are expected to, will continue, is anticipated, estimate, plan, project or similar expressions identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those currently

51 49 anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that could affect our financial performance and could cause our actual results in future periods to differ materially from any current opinions or statements. Our future results could be affected by a variety of factors, such as: competitive dynamics in the consumer foods industry and the markets for our products, including new product introductions, advertising activities, pricing actions, and promotional activities of our competitors; economic conditions, including changes in inflation rates, interest rates, or tax rates; product development and innovation; consumer acceptance of new products and product improvements; consumer reaction to pricing actions and changes in promotion levels; acquisitions or dispositions of businesses or assets; changes in capital structure; changes in laws and regulations, including labeling and advertising regulations; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets, or changes in the useful lives of other intangible assets; changes in accounting standards and the impact of significant accounting estimates; product quality and safety issues, including recalls and product liability; changes in customer demand for our products; effectiveness of advertising, marketing, and promotional programs; changes in consumer behavior, trends, and preferences, including weight loss trends; consumer perception of healthrelated issues, including obesity; consolidation in the retail environment; changes in purchasing and inventory levels of significant customers; fluctuations in the cost and availability of supply chain resources, including raw materials, packaging, and energy; disruptions or inefficiencies in the supply chain; volatility in the market value of derivatives used to hedge price risk for certain commodities; benefit plan expenses due to changes in plan asset values and discount rates used to determine plan liabilities; failure of our information technology systems; resolution of uncertain income tax matters; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic uncertainty due to terrorism or war. We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk stemming from changes in interest rates, foreign exchange rates, commodity prices and equity prices. Changes in these factors could cause fluctuations in our earnings and cash flows. In the normal course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. The counterparties in these transactions are generally highly rated institutions. We establish credit limits for each counterparty. Our hedging transactions include but are not limited to a variety of derivative financial instruments. INTEREST RATE RISK We are exposed to interest rate volatility with regard to future issuances of fixed rate debt, and existing and future issuances of variable rate debt. Primary exposures include U.S. Treasury rates, LIBOR, and commercial paper rates in the United States and Europe. We use interest rate swaps and forwardstarting interest rate swaps to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed- versus floatingrate debt, based on current and projected market conditions. Generally under these swaps, we agree with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed notional principal amount. As of May 27, 2007, we had $3.7 billion of aggregate notional principal amount outstanding. This includes notional amounts of offsetting swaps that neutralize our exposure to interest rates on other interest rate swaps. See Note 7 to the Consolidated Financial Statements on pages 66 through 69 of this report. FOREIGN EXCHANGE RISK Foreign currency fluctuations affect our net investments in foreign subsidiaries, and foreign currency cash flows related to third party purchases, intercompany loans, and product shipments. We are also exposed to the translation of foreign currency earnings to the U.S. dollar. Our principal exposures are to the Australian dollar, British pound sterling, Canadian dollar, Euro, and Mexican peso. We primarily use foreign currency forward contracts to selectively hedge our foreign currency cash flow exposures. We generally do not hedge more than 12 months forward. We also have many net investments in foreign subsidiaries that are denominated in Euros. We hedge a portion of these net investments by issuing Eurodenominated commercial paper. As of May 27, 2007, we had issued $402 million of Euro-denominated commercial paper that we have designated as a net investment hedge and thus

52 50 deferred net foreign currency transaction losses of $27 million to accumulated other comprehensive income (loss). COMMODITY PRICE RISK Many commodities we use in the production and distribution of our products are exposed to market price risks. We utilize derivatives to hedge price risk for our principal ingredient and energy costs, including grains (oats, wheat, and corn), oils (principally soybean), non-fat dry milk, natural gas, and diesel fuel. We manage our exposures through a combination of purchase orders, long-term contracts with suppliers, exchange-traded futures and options, and over-thecounter options and swaps. We offset our exposures based on current and projected market conditions, and generally seek to acquire the inputs at as close to our planned cost as possible. interest rate, foreign currency, commodity and equity marketrisk-sensitive instruments outstanding as of May 27, 2007, and May 28, 2006, and the average fair value impact during the year ended May 27, May 27, 2007 Fair Value Impact Average during fiscal 2007 May 28, 2006 In Millions Interest rate instruments $10 $10 $8 Foreign currency instruments Commodity instruments Equity instruments EQUITY INSTRUMENTS Equity price movements affect our compensation expense as certain investments owned by our employees are revalued. We use equity swaps to manage this market risk. VALUE AT RISK The estimates in the table below are intended to measure the maximum potential fair value we could lose in one day from adverse changes in market interest rates, foreign exchange rates, commodity prices, and equity prices under normal market conditions. A Monte Carlo value-at-risk (VAR) methodology was used to quantify the market risk for our exposures. The models assumed normal market conditions and used a 95 percent confidence level. The VAR calculation used historical interest rates, foreign exchange rates and commodity and equity prices from the past year to estimate the potential volatility and correlation of these rates in the future. The market data were drawn from the RiskMetrics data set. The calculations are not intended to represent actual losses in fair value that we expect to incur. Further, since the hedging instrument (the derivative) inversely correlates with the underlying exposure, we would expect that any loss or gain in the fair value of our derivatives would be generally offset by an increase or decrease in the fair value of the underlying exposures. The positions included in the calculations were: debt; investments; interest rate swaps; foreign exchange forwards; commodity swaps, futures and options; and equity instruments. The calculations do not include the underlying foreign exchange and commodities-related positions that are hedged by these market-risk-sensitive instruments. The table below presents the estimated maximum potential VAR arising from a one-day loss in fair value for our

53 51 Reports of Management REPORT OF MANAGEMENT RESPONSIBILITIES The management of General Mills, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The statements have been prepared in accordance with accounting principles that are generally accepted in the United States, using management s best estimates and judgments where appropriate. The financial information throughout the Annual Report on Form 10-K is consistent with our consolidated financial statements. Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately in all material respects, in accordance with management s authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate separation of duties and responsibilities, and there are documented policies regarding use of our assets and proper financial reporting. These formally stated and regularly communicated policies demand highly ethical conduct from all employees. The Audit Committee of the Board of Directors meets regularly with management, internal auditors and our independent auditors to review internal control, auditing and financial reporting matters. The independent auditors, internal auditors and employees have full and free access to the Audit Committee at any time. The Audit Committee reviewed and approved the Company s annual financial statements and recommended to the full Board of Directors that they be included in the Annual Report. The Audit Committee also recommended to the Board of Directors that the independent auditors be reappointed for fiscal 2008, subject to ratification by the stockholders at the annual meeting. MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of General Mills, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of The Company s internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of May 27, In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on our assessment using the criteria set forth by COSO in Internal Control Integrated Framework, management concluded that our internal control over financial reporting was effective as of May 27, KPMG LLP, an independent registered public accounting firm, has issued an audit report on management s assessment of the Company s internal control over financial reporting. S. W. Sanger Chairman of the Board and Chief Executive Officer July 26, 2007 J. A. Lawrence Vice Chairman and Chief Financial Officer S. W. Sanger Chairman of the Board and Chief Executive Officer J. A. Lawrence Vice Chairman and Chief Financial Officer July 26, 2007

54 52 Reports of Independent Registered Public Accounting Firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders General Mills, Inc.: We have audited the accompanying consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 27, 2007, and May 28, 2006, and the related consolidated statements of earnings, stockholders equity and comprehensive income, and cash flows for each of the fiscal years in the three-year period ended May 27, In connection with our audits of the consolidated financial statements we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Mills, Inc. and subsidiaries as of May 27, 2007, and May 28, 2006, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended May 27, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the accompanying financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. In fiscal 2007, as disclosed in Notes 1 and 2 to the consolidated financial statements, the Company changed its classification of shipping costs, changed its annual goodwill impairment assessment date to December 1, and adopted SFAS No. 123 (Revised), Share-Based Payment, and SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of General Mills internal control over financial reporting as of May 27, 2007, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 26, 2007, expressed an unqualified opinion on management s assessment of, and the effective operation of, internal control over financial reporting. Minneapolis, Minnesota July 26, 2007

55 53 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REGARDING INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Stockholders General Mills, Inc.: We have audited management s assessment, included in the accompanying Management s Report on Internal Control over Financial Reporting, that General Mills, Inc. and subsidiaries maintained effective internal control over financial reporting as of May 27, 2007, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). General Mills management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management s assessment and an opinion on the effectiveness of the Company s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management s assessment that General Mills maintained effective internal control over financial reporting as of May 27, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control Integrated Framework issued by COSO. Also, in our opinion, General Mills maintained, in all material respects, effective internal control over financial reporting as of May 27, 2007, based on criteria established in Internal Control Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 27, 2007, and May 28, 2006, and the related consolidated statements of earnings, stockholders equity and comprehensive income, and cash flows, for each of the fiscal years in the three-year period ended May 27, 2007, and our report dated July 26, 2007, expressed an unqualified opinion on those consolidated financial statements. Minneapolis, Minnesota July 26, 2007

56 54 Consolidated Statements of Earnings GENERAL MILLS, INC. AND SUBSIDIARIES In Millions, Except per Share Data Fiscal Year Ended May 27, 2007 May 28, 2006 May 29, 2005 Net sales $12,442 $11,712 $11,308 Cost of sales 7,955 7,545 7,326 Selling, general and administrative expenses 2,390 2,179 1,998 Restructuring, impairment and other exit costs Operating profit 2,058 1,958 1,900 Divestitures (gain) (499) Debt repurchase costs 137 Interest expense, net Earnings before income taxes and after-tax earnings from joint ventures 1,631 1,559 1,807 Income taxes After-tax earnings from joint ventures Net earnings $ 1,144 $ 1,090 $ 1,240 Earnings per share basic $ 3.30 $ 3.05 $ 3.34 Earnings per share diluted $ 3.18 $ 2.90 $ 3.08 Dividends per share $ 1.44 $ 1.34 $ 1.24 See accompanying notes to consolidated financial statements.

57 55 Consolidated Balance Sheets GENERAL MILLS, INC. AND SUBSIDIARIES In Millions May 27, 2007 May 28, 2006 ASSETS Current assets: Cash and cash equivalents $ 417 $ 647 Receivables Inventories 1,174 1,055 Prepaid expenses and other current assets Deferred income taxes Total current assets 3,054 3,041 Land, buildings and equipment 3,014 2,997 Goodwill 6,835 6,652 Other intangible assets 3,694 3,607 Other assets 1,587 1,778 Total assets $18,184 $18,075 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 778 $ 673 Current portion of long-term debt 1,734 2,131 Notes payable 1,254 1,503 Other current liabilities 2,079 1,831 Total current liabilities 5,845 6,138 Long-term debt 3,218 2,415 Deferred income taxes 1,433 1,690 Other liabilities 1, Total liabilities 11,726 11,167 Minority interests 1,139 1,136 Stockholders equity: Common stock, 502 shares issued Additional paid-in capital 5,842 5,737 Retained earnings 5,745 5,107 Common stock in treasury, at cost, shares of 162 in 2007 and 146 in 2006 (6,198) (5,163) Unearned compensation (84) Accumulated other comprehensive income (loss) (120) 125 Total stockholders equity 5,319 5,772 Total liabilities and equity $18,184 $18,075 See accompanying notes to consolidated financial statements.

58 56 Consolidated Statements of Stockholders Equity and Comprehensive Income GENERAL MILLS, INC. AND SUBSIDIARIES $.10 Par Value Common Stock (One Billion Shares Authorized) Issued Treasury Additional Par Paid-In Amount Capital Shares Amount Retained Earnings Unearned Compensation Accumulated Other Comprehensive Income (Loss) In Millions, Except per Share Data Shares Total Balance as of May 30, $50 $5,630 (123) $(3,921) $3,722 $ (89) $(144) $ 5,248 Comprehensive income: Net earnings 1,240 1,240 Other comprehensive income, net of tax: Net change on hedge derivatives Foreign currency translation Minimum pension liability adjustment (22) (22) Other comprehensive income Total comprehensive income 1,392 Cash dividends declared ($1.24 per share) (461) (461) Stock compensation plans (includes income tax benefits of $62) Shares purchased (17) (771) (771) Forward purchase contract fees (43) (43) Unearned compensation related to restricted stock awards (66) (66) Earned compensation and other Balance as of May 29, $50 $5,691 (133) $(4,460) $4,501 $(114) $ 8 $ 5,676 Comprehensive income: Net earnings 1,090 1,090 Other comprehensive income, net of tax: Net change on hedge derivatives Foreign currency translation Minimum pension liability adjustment Other comprehensive income Total comprehensive income 1,207 Cash dividends declared ($1.34 per share) (484) (484) Stock compensation plans (includes income tax benefits of $41) Shares purchased (19) (892) (892) Unearned compensation related to restricted stock awards (17) (17) Earned compensation and other Balance as of May 28, $50 $5,737 (146) $(5,163) $5,107 $ (84) $ 125 $ 5,772 Comprehensive income: Net earnings 1,144 1,144 Other comprehensive income, net of tax: Net change on hedge derivatives Foreign currency translation Minimum pension liability adjustment (21) (21) Other comprehensive income Total comprehensive income 1,339 Adoption of SFAS No. 123R (84) 84 AdoptionofSFASNo.158 (440) (440) Cash dividends declared ($1.44 per share) (506) (506) Stock compensation plans (includes income tax benefits of $73) Shares purchased (25) (1,385) (1,385) Unearned compensation related to restricted stock awards (95) (95) Issuance of shares to settle conversion premium on zero coupon convertible debentures, net of tax (11) 11 Earned compensation and other Balance as of May 27, $50 $5,842 (162) $(6,198) $5,745 $ $(120) $ 5,319 See accompanying notes to consolidated financial statements.

59 57 Consolidated Statements of Cash Flows GENERAL MILLS, INC. AND SUBSIDIARIES In Millions Fiscal Year Ended May 27, 2007 May 28, 2006 May 29, 2005 Cash Flows Operating Activities Net earnings $ 1,144 $ 1,090 $ 1,240 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization After-tax earnings from joint ventures (73) (69) (94) Stock-based compensation Deferred income taxes Distribution of earnings from joint ventures Tax benefit on exercised options Pension, other postretirement, and postemployment benefit costs (54) (74) (70) Restructuring, impairment and other exit costs Divestitures (gain) (499) Debt repurchase costs 137 Changes in current assets and liabilities Other, net Net cash provided by operating activities 1,765 1,848 1,794 Cash Flows Investing Activities Purchases of land, buildings and equipment (460) (360) (434) Acquisitions (85) (26) Investments in affiliates, net (100) 1 1 Proceeds from disposal of land, buildings and equipment Proceeds from disposition of businesses 799 Proceeds from dispositions of product lines 14 Other, net Net cash provided (used) by investing activities (597) (369) 413 Cash Flows Financing Activities Change in notes payable (280) 1,197 (1,057) Issuance of long-term debt 2,650 2 Payment of long-term debt (2,323) (1,386) (1,115) Proceeds from issuance of preferred membership interests of subsidiary 835 Common stock issued Tax benefit on exercised options 73 Purchases of common stock for treasury (1,321) (885) (771) Dividends paid (506) (485) (461) Other, net (8) (3) (13) Net cash used by financing activities (1,398) (1,405) (2,385) Increase (decrease) in cash and cash equivalents (230) 74 (178) Cash and cash equivalents beginning of year Cash and cash equivalents end of year $ 417 $ 647 $ 573 Cash Flow from Changes in Current Assets and Liabilities: Receivables $ (24) $ 8 $ (8) Inventories (116) (6) 30 Prepaid expenses and other current assets (45) (33) 1 Accounts payable 88 (28) (35) Other current liabilities Changes in current assets and liabilities $ 77 $ 184 $ 251 See accompanying notes to consolidated financial statements.

60 58 Notes to Consolidated Financial Statements GENERAL MILLS, INC. AND SUBSIDIARIES NOTE 1 Basis of Presentation and Reclassifications BASIS OF PRESENTATION Our Consolidated Financial Statements include the accounts of General Mills, Inc. and all subsidiaries in which we have a controlling financial interest. Intercompany transactions and accounts are eliminated in consolidation. Our fiscal year ends on the last Sunday in May. Fiscal years 2007, 2006, and 2005 each consisted of 52 weeks. Financial results for our International segment, with the exception of Canada, its export operations, and its United States and Latin American headquarters are reported as of and for the 12 calendar months ended April 30. RECLASSIFICATIONS During fiscal 2007, we made certain changes in our reporting of financial information. The effects of these reclassifications on our historical Consolidated Financial Statements are reflected herein and had no impact on our consolidated net earnings or earnings per share. We made a change in accounting principle to classify shipping costs associated with the distribution of finished products to our customers as cost of sales. We previously recorded these costs in selling, general and administrative (SG&A) expense. We made this change in principle because we believe the classification of these shipping costs in cost of sales better reflects the cost of producing and distributing our products and aligns our external financial reporting with the results we use internally to evaluate segment operating performance. The impact of this change in principle was an increase to cost of sales of $474 million in fiscal 2006 and $388 million in fiscal 2005, and a corresponding decrease to SG&A expense in each period. We shifted sales responsibility for several customers from our Bakeries and Foodservice segment to our U.S. Retail segment. Net sales and segment operating profit for these two segments have been adjusted to report the results from shifted businesses with the appropriate segment. The impact of this shift was a decrease in net sales of our Bakeries and Foodservice segment and an increase in net sales of our U.S. Retail segment of $55 million in fiscal 2006 and $60 million in fiscal The impact of this shift was a decrease of Bakeries and Foodservice segment operating profit and an increase of U.S. Retail segment operating profit of $22 million in fiscal 2006 and $26 million in fiscal We also reclassified (i) certain trade-related costs and customer allowances as cost of sales or SG&A expense (previously recorded as reductions of net sales), (ii) certain liabilities, including trade and consumer promotion accruals, from accounts payable to other current liabilities, (iii) certain distributions from joint ventures as operating cash flows (previously reported as investing cash flows), (iv) royalties from a joint venture to after-tax earnings from joint ventures (previously recorded as a reduction of SG&A expense), (v) certain receivables, including accrued interest, derivatives and other miscellaneous receivables, that were historically included in receivables to other current assets, and (vi) valuation allowances related to deferred income tax assets between current and non-current classification. These reclassifications were not material individually or in the aggregate. We have reclassified previously reported Consolidated Balance Sheets, Consolidated Statements of Earnings, and Consolidated Statements of Cash Flows to conform to the current year presentation. CHANGE IN REPORTING PERIOD We changed the reporting period for our Häagen-Dazs joint ventures in Asia to include results through March 31. In previous years, we included results for the twelve months ended April 30. Accordingly, fiscal 2007 results include only 11 months of results from these joint ventures compared to 12 months in fiscal 2006 and The impact of this change was not material to our results of operations, thus we did not restate prior period financial statements for comparability. NOTE 2 Summary of Significant Accounting Policies CASH AND CASH EQUIVALENTS We consider all investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORIES All inventories in the United States other than grain are valued at the lower of cost, using the last-in, first-out (LIFO) method, or market. Grain inventories and all related cash contracts and derivatives are valued at market with all changes in value recorded in net earnings currently. Inventories outside of the United States are valued at the lower of cost, using the first-in, first-out (FIFO) method, or market. Shipping costs associated with the distribution of finished product to our customers are recorded as cost of sales and are recognized when the related finished product is shipped to the customer. LAND, BUILDINGS, EQUIPMENT, AND DEPRECIATION Land is recorded at historical cost. Buildings and equipment, including capitalized interest and internal engineering costs, are recorded at cost and depreciated over estimated useful lives, primarily using the straight-line method. Ordinary maintenance and repairs are charged to operating costs.

61 59 Buildings are usually depreciated over 40 to 50 years, and equipment, furniture, and software is usually depreciated over 3 to 15 years. Fully depreciated assets are retained in buildings and equipment until disposal. When an item is sold or retired, the accounts are relieved of its cost and related accumulated depreciation; the resulting gains and losses, if any, are recognized in earnings. As of May 27, 2007, and May 28, 2006, assets held for sale were insignificant. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and disposition of the asset group are less than the carrying amount of the asset group. Asset groups have identifiable cash flows and largely independent of other asset groups. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent appraisals, as appropriate. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the difference between the purchase price of acquired companies and the related fair values of net assets acquired. Goodwill is not amortized, and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Impairment testing is performed for each of our reporting units. We compare the carrying value of a reporting unit, including goodwill, to the fair value of the unit. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. If the carrying amount of a reporting unit exceeds its fair value, we revalue all assets and liabilities of the reporting unit, excluding goodwill, to determine if the fair value of the net assets is greater than the net assets including goodwill. If the fair value of the net assets is less than the net assets including goodwill, impairment has occurred. Our estimates of fair value are determined based on a discounted cash flow model. Growth rates for sales and profits are determined using inputs from our annual long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors. We periodically engage third-party valuation consultants to assist in this process. During fiscal 2007, we changed the timing of our annual goodwill impairment testing from the first day of our fiscal year to December 1. This accounting change is preferable because it better aligns this impairment test with the timing of the presentation of our strategic long-range plan to the Board of Directors. During fiscal 2007, we performed this annual impairment test on May 29, 2006, and again on December 1, We evaluate the useful lives of our other intangible assets, primarily intangible assets associated with the Pillsbury, Totino s, Progresso, Green Giant, Old El Paso and Häagen- Dazs brands, to determine if they are finite or indefinitelived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets. Our indefinite-lived intangible assets, primarily brands, also are tested for impairment annually, and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We performed our fiscal 2007 assessment of our brand intangibles as of December 1, Our estimate of the fair value of the brands was based on a discounted cash flow model using inputs which included: projected revenues from our annual long-range plan; assumed royalty rates that could be payable if we did not own the brands; and a discount rate. We periodically engage thirdparty valuation consultants to assist in this process. INVESTMENTS IN JOINT VENTURES Our investments in companies over which we have the ability to exercise significant influence are stated at cost plus our share of undistributed earnings or losses. We also receive royalty income from certain joint ventures, incur various expenses (primarily research and development), and record the tax impact of certain joint venture operations that are structured as partnerships. In addition, we make advances to our joint ventures in the form of loans or capital investments as needed by the joint ventures. We also sell certain raw materials, semifinished goods and finished goods to the joint ventures, generally at market prices. VARIABLE INTEREST ENTITIES As of May 27, 2007, we had invested in 5 variable interest entities (VIEs). We are the primary beneficiary (PB) of General Mills Capital, Inc. (GM Capital). In June 2007, we repurchased its outstanding securities. We have an interest in a contract manufacturer at our former facility in Geneva, Illinois. We are the PB and have consolidated this entity as of May 27, This entity had property and equipment with a fair value of $37 million and long-term debt of $37 million as of May 27, We also have an interest in a contract manufacturer in Greece that is a VIE. Although we are the PB, we have not consolidated this entity because it is not material to our results of operations, financial condition, or liquidity as of and for the year ended

62 60 May 27, This entity had assets of $3 million and liabilities of $1 million as of May 27, We are not the PB of the remaining 2 VIEs. Following our repurchase of the GM Capital preferred stock our maximum exposure to loss from the 4 remaining VIEs is limited to the $37 million of longterm debt of the contract manufacturer in Geneva, Illinois and our $3 million equity investment in two of the VIEs. REVENUE RECOGNITION We recognize sales revenue when the shipment is accepted by our customer. Sales include shipping and handling charges billed to the customer and are reported net of consumer coupon, trade promotion and other costs, including estimated returns. Sales, use, value-added, and other excise taxes are not recognized in revenue. Coupons are expensed when distributed, based on estimated redemption rates. Trade promotions are expensed based on estimated participation and performance levels for offered programs. We generally do not allow a right of return. However, on a limited case-by-case basis with prior approval, we may allow customers to return product in saleable condition for redistribution to other customers or outlets. Returns are expensed as reductions of net sales. Receivables are recorded net of an allowance for uncollectible amounts and prompt pay discounts. Receivables from customers generally do not bear interest. Terms and collection patterns vary around the world and by channel. The allowance for doubtful accounts represents our estimate of probable credit losses in our existing receivables, as determined based on a review of past due balances and other specific account data. Account balances are written off against the allowance when the amount is deemed uncollectible by management. ENVIRONMENTAL Environmental costs relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Reserves for liabilities for anticipated remediation costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or our commitment to a plan of action. Environmental expenditures for projects that contribute to current or future operations generally are capitalized and depreciated over their estimated useful lives. ADVERTISING PRODUCTION COSTS We expense the production costs of advertising the first time that the advertising takes place. RESEARCH AND DEVELOPMENT All expenditures for research and development (R&D) are charged against earnings in the year incurred. R&D includes expenditures for new product and manufacturing process innovation, and the annual expenditures are comprised primarily of internal salaries, wages, consulting, and other supplies attributable to time spent on R&D activities. Other costs include depreciation and maintenance of research facilities, including assets at facilities that are engaged in pilot plant activities. FOREIGN CURRENCY TRANSLATION For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the period-end exchange rates. Income statement accounts are translated using the average exchange rates prevailing during the year. Translation adjustments are reflected within accumulated other comprehensive income (loss) in stockholders equity. Gains and losses from foreign currency transactions are included in net earnings for the period. DERIVATIVE INSTRUMENTS We use derivatives primarily to hedge our exposure to changes in foreign exchange rates, interest rates, and commodity prices. All derivatives are recognized on the Consolidated Balance Sheets at fair value based on quoted market prices or management s estimate of their fair value and are recorded in either current or noncurrent assets or liabilities based on their maturity. Changes in the fair values of derivatives are recorded in net earnings or other comprehensive income, based on whether the instrument is designated as a hedge transaction and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in accumulated other comprehensive income (loss) are reclassified to earnings in the period the hedged item affects earnings. If the underlying hedged transaction ceases to exist, any associated amounts reported in accumulated other comprehensive income (loss) are reclassified to earnings at that time. Any ineffectiveness is recognized in earnings in the current period. STOCK-BASED COMPENSATION Effective May 29, 2006, we adopted SFAS No. 123 (Revised), Share-Based Payment (SFAS 123R), which changed the accounting for compensation expense associated with stock options, restricted stock awards, and other forms of equity compensation. We elected the modified prospective transition method as permitted by SFAS 123R; accordingly, results from prior periods have not been restated. Under this method, stock-based compensation expense for fiscal 2007 was $128 million, which included amortization related to the remaining unvested portion of all equity compensation awards granted prior to May 29, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and amortization related to all equity compensation awards granted on or subsequent to May 29, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The incremental effect on net earnings in fiscal 2007 of our adoption

63 61 of SFAS 123R was $69 million of expense ($43 million aftertax). All our stock compensation expense is recorded in SG&A expense in the Consolidated Statement of Earnings. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as previously required, thereby reducing net operating cash flows and increasing net financing cash flows in periods following adoption. While those amounts cannot be estimated for future periods, the amount of cash flows generated for such excess tax deductions was $73 million for fiscal 2007, $41 million for fiscal 2006, and $62 million for fiscal Certain equity-based compensation plans contain provisions that accelerate vesting of awards upon retirement, disability, or death of eligible employees and directors. SFAS 123R specifies that a stock-based award is vested when the employee s retention of the award is no longer contingent on providing subsequent service. Accordingly, beginning in fiscal 2007, we prospectively revised our expense attribution method so that the related compensation cost is recognized immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period. For fiscal 2006 and 2005, we generally recognized stock compensation expense over the stated vesting period of the award, with any unamortized expense recognized immediately if an acceleration event occurred. Prior to May 29, 2006, we used the intrinsic value method for measuring the cost of compensation paid in our common stock. No compensation expense for stock options was recognized in our Consolidated Statements of Earnings prior to fiscal 2007, as the exercise price was equal to the market price of our stock at the date of grant. Expense attributable to other types of share-based awards was recognized in our results under SFAS 123. The following table illustrates the pro forma effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to all employee stock-based compensation, net of estimated forfeitures: In Millions, Except per Share Data May 28, May 29, Fiscal Year Ended Net earnings, as reported $1,090 $1,240 Add: After-tax stock-based employee compensation expense included in reported net earnings Deduct: After-tax stock-based employee compensation expense determined under fair value requirements of SFAS 123 (48) (62) Pro forma net earnings $1,070 $1,202 Earnings per share: Basic as reported $ 3.05 $ 3.34 Basic pro forma $ 2.99 $ 3.24 Diluted as reported $ 2.90 $ 3.08 Diluted pro forma $ 2.84 $ 2.99 DEFINED BENEFIT PENSION, OTHER POSTRETIRE- MENT, AND POSTEMPLOYMENT BENEFIT PLANS We sponsor several domestic and foreign defined benefit plans to provide pension, health care, and other welfare benefits to retired employees. Under certain circumstances, we also provide accruable benefits to former or inactive employees in the United States and Canada and members of our Board of Directors, including severance, long-term disability, and certain other benefits payable upon death. We recognize an obligation for any of these benefits that vest or accumulate with service. Postemployment benefits that do not vest or accumulate with service (such as severance based solely on annual pay rather than years of service) are charged to expense when incurred. Our postemployment benefit plans are unfunded. Refer to Note 13 for further information on these benefits and the amount of expense recognized during the periods presented. We account for our defined benefit pension, other postretirement, and postemployment benefit plans in accordance with SFAS No. 87, Employers Accounting for Pensions, SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions, and SFAS No. 112, Employers Accounting for Postemployment Benefits An Amendment of FASB Statements No. 5 and 43, in measuring plan assets and benefit obligations and in determining the amount of net periodic benefit cost and SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158), which was issued in September 2006 and is effective for us as of

64 62 May 27, SFAS 158 requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability and recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income (loss), which is a component of stockholders equity. As a result of the implementation of SFAS 158, we recognized an after-tax decrease in accumulated other comprehensive income (loss) of $440 million for all of our defined benefit pension, other postretirement, and postemployment benefit plans. This includes the incremental impact of recognizing our share of the underfunded status of Cereal Partners Worldwide s (CPW) defined benefit pension plan in the United Kingdom. Prior periods are not restated. We had previously applied postretirement accounting concepts for purposes of recognizing our postemployment benefit obligations. Accordingly, the adoption of SFAS 158 as of May 27, 2007, affected the balance sheet display of our defined benefit pension, other postretirement, and postemployment benefit obligations as follows: In Millions Before Application of SFAS 158 (a) SFAS 158 Adjustments After Application of SFAS 158 Other assets $ 1,978 $(391) $ 1,587 Total assets 18,575 (391) 18,184 Other current liabilities 2, ,079 Total current liabilities 5, ,845 Deferred income taxes 1,681 (248) 1,433 Other liabilities ,230 Total liabilities 11, ,726 Accumulated other comprehensive income (loss) 320 (440) (120) Total stockholders equity 5,759 (440) 5,319 Total liabilities and stockholders equity 18,575 (391) 18,184 (a) Includes additional minimum pension liability adjustment under pre-existing guidance of $33 million, which reduced accumulated other comprehensive income (loss) by $21 million on an after-tax basis. Our net earnings, cash flow, liquidity, debt covenants, and plan funding requirements were not affected by this change in accounting principle. We use our fiscal year end as the measurement date for our United States and Canadian defined benefit plans and will adopt the measurement requirements of SFAS 158 for our foreign plans in fiscal estimates and assumptions that affect reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. OTHER NEW ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board (FASB) ratified the consensus of Emerging Issues Task Force Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). EITF 06-3 concluded that the presentation of taxes imposed on revenue-producing transactions (sales, use, value added, and excise taxes) on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy that should be disclosed. We adopted EITF 06-3 in the fourth quarter of fiscal 2007, and it did not have any impact on our results of operations or financial condition. In the first quarter of fiscal 2007, we adopted SFAS No. 151, Inventory Costs An Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The adoption of SFAS 151 did not have any impact on our results of operations or financial condition. In the second quarter of fiscal 2006, we adopted SFAS No. 153, Exchanges of Nonmonetary Assets An Amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. The adoption of SFAS 153 did not have any impact on our results of operations or financial condition. In March 2005, FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 requires that liabilities be recognized for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. We adopted FIN 47 in the fourth quarter of fiscal 2006, and it did not have a material impact on our results of operations or financial condition. USE OF ESTIMATES Preparing our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires us to make

65 63 NOTE 3 Acquisitions and Divestitures During the fourth quarter of fiscal 2007, we sold our frozen pie product line, including a plant in Rochester, New York. We received $1 million in proceeds and recorded a $4 million loss on the sale in fiscal During the third quarter of fiscal 2007, we completed the acquisition of Saxby Bros. Limited, a chilled pastry company in the United Kingdom, for approximately $24 million. This business, which had sales of $24 million in calendar 2006, complements our existing frozen pastry business in the United Kingdom. In addition, we completed an acquisition in Greece for $3 million. On July 14, 2006, CPW completed the acquisition of the Uncle Tobys cereal business in Australia for approximately $385 million. We funded our 50 percent share of the purchase price by making additional advances to and equity contributions in CPW totaling $135 million (classified as investments in affiliates, net, on the Consolidated Statements of Cash Flows) and by acquiring a 50 percent undivided interest in certain intellectual property for $58 million (classified as acquisitions on the Consolidated Statements of Cash Flows). Also during the first quarter of fiscal 2007, we sold our par-baked bread product line, including plants in Chelsea, Massachusetts and Tempe, Arizona. We received $13 million in proceeds and recorded a $6 million loss on the sale in fiscal 2007, including the write-off of $6 million of goodwill. During the fourth quarter of fiscal 2006, we acquired Elysées Consult SAS, the franchise operator of a Häagen- Dazs shop in France. During the second quarter of fiscal 2006, we acquired Croissant King, a producer of frozen pastry products in Australia. We also acquired a controlling financial interest in Pinedale Holdings Pte. Limited, an operator of Häagen-Dazs cafes in Singapore and Malaysia. The aggregate purchase price of our fiscal 2006 acquisitions was $26 million. The pro forma effect of our acquisitions and divestitures in fiscal 2007 and fiscal 2006 was not material. During the fourth quarter of fiscal 2005, we sold our Lloyd s barbecue product line to Hormel Foods Corporation. During the third quarter of fiscal 2005, Snack Ventures Europe (SVE), our snacks joint venture with PepsiCo, Inc., was terminated and our 40.5 percent interest was redeemed. We received $799 million in cash proceeds from these dispositions and recorded $499 million in gains in fiscal NOTE 4 Restructuring, Impairment, and Other Exit Costs We view our restructuring activities as a way to provide greater reliability in meeting our long-term growth targets. Activities we undertake must meet internal rate of return and net present value targets. Each restructuring action normally takes one to two years to complete. At completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation. These activities result in various restructuring costs, including asset write-offs, exit charges including severance, contract termination fees, and decommissioning and other costs. In fiscal 2007, we recorded restructuring, impairment and other exit costs pursuant to approved plans as follows: In Millions Non-cash impairment charge for certain Bakeries and Foodservice product lines $37 Gain from our previously closed plant in San Adrian, Spain (7) Loss from divestitures of our par-baked bread and frozen pie product lines 10 Adjustment of reserves from previously announced restructuring actions (1) Total $39 As part of our long-range planning process, we determined that certain product lines in our Bakeries and Foodservice segment were underperforming. In late May 2007, we concluded that the future cash flows generated by these product lines will be insufficient to recover the net book value of the related long-lived assets. Accordingly, we recorded a non-cash impairment charge of $37 million against these assets in the fourth quarter of fiscal In fiscal 2006, we recorded restructuring, impairment and other exit costs pursuant to approved plans as follows: In Millions Closure of our Swedesboro, New Jersey plant $13 Closure of a production line at our Montreal, Quebec plant 6 Restructuring actions at our Allentown, Pennsylvania plant 4 Asset impairment charge at our Rochester, New York plant 3 Adjustment of reserves primarily from previously announced fiscal 2005 restructuring actions 4 Total $30

66 64 The fiscal 2006 initiatives were undertaken to increase asset utilization and reduce manufacturing costs. The actions included decisions to: close our leased frozen dough foodservice plant in Swedesboro, New Jersey, affecting 101 employees; shut down a portion of our frozen dough foodservice plant in Montreal, Quebec, affecting 77 employees; realign and modify product and manufacturing capabilities at our frozen waffle plant in Allentown, Pennsylvania, affecting 72 employees; and complete the fiscal 2005 initiative to relocate our frozen baked goods line from our plant in Chelsea, Massachusetts, affecting 175 employees. In fiscal 2005, we recorded restructuring and other exit costs pursuant to approved plans, as follows: In Millions Various supply chain initiatives $74 Bakeries and Foodservice severance charges from fiscal 2004 decisions 3 Other charges associated with restructuring actions prior to fiscal Total $84 The fiscal 2005 initiatives were undertaken to further increase asset utilization and reduce manufacturing and sourcing costs, resulting in decisions regarding plant closures and production realignment. The actions included decisions to: close our flour milling plant in Vallejo, California, affecting 43 employees; close our par-baked bread plant in Medley, Florida, affecting 42 employees; relocate bread production from our Swedesboro, New Jersey plant, affecting 110 employees; relocate a portion of our cereal production from Cincinnati, Ohio, affecting 45 employees; close our snacks foods plant in Iowa City, Iowa, affecting 83 employees; close our dry mix production at Trenton, Ontario, affecting 53 employees; and relocate our frozen baked goods line from our plant in Chelsea, Massachusetts to another facility. These fiscal 2005 supply chain actions also resulted in certain associated expenses in fiscal 2005, primarily resulting from adjustments to the depreciable life of the assets necessary to reflect the shortened asset lives which coincided with the final production dates at the Cincinnati and Iowa City plants. These associated expenses were recorded as cost of sales and totaled $18 million. The roll forward of our restructuring and other exit cost reserves, included in other current liabilities, is as follows: In Millions Severance Other Exit Costs Total Reserve balance as of May 30, 2004 $ 13 $ 8 $ Charges Utilized in 2005 (16) (16) (32) Reserve balance as of May 29, Charges Utilized in 2006 (8) (5) (13) Reserve balance as of May 28, Charges (1) (1) Utilized in 2007 (5) (5) (10) Reserve balance as of May 27, 2007 $ 3 $ 1 $ 4 NOTE 5 Investments in Joint Ventures We have a 50 percent equity interest in CPW that manufactures and markets ready-to-eat cereal products in more than 130 countries and republics outside the United States and Canada. CPW also markets cereal bars in several European countries and manufactures private label cereals for customers in the United Kingdom. We have guaranteed a portion of CPW s debt and its pension obligation in the United Kingdom. See Note 15 on pages 81 and 82. Results from our CPW joint venture are reported as of and for the 12 months ended March 31. We have 50 percent equity interests in Häagen-Dazs Japan, Inc. and Häagen-Dazs Korea Company Limited. We also had a 49 percent equity interest in HD Distributors (Thailand) Company Limited. Subsequent to its fiscal year end, we acquired a controlling interest in this joint venture. These joint ventures manufacture, distribute and market Häagen-Dazs frozen ice cream products and novelties. In fiscal 2007, we changed this reporting period to include results through March 31. In previous years, we included results for the twelve months ended April 30. Accordingly, fiscal 2007 results include only 11 months of results from these joint ventures compared to 12 months in fiscal The impact of this change was not material to our consolidated results of operations, so we did not restate prior periods for comparability. We also have a 50 percent equity interest in Seretram, a joint venture for the production of Green Giant canned corn in France. Seretram s results are reported as of and for the 12 months ended April 30. We have a 50 percent equity interest in 8th Continent, LLC, a domestic joint venture to develop and market

67 65 soy-based products. 8th Continent s results are presented on the same basis as our fiscal year. Fiscal 2005 results of operations includes our share of the after-tax earnings of SVE through the date of its termination on February 28, During the first quarter of fiscal 2007, CPW acquired the Uncle Tobys cereal business in Australia for approximately $385 million. We funded advances and an equity contribution to CPW from cash generated from our international operations, including our international joint ventures. In February 2006, CPW announced a restructuring of its manufacturing plants in the United Kingdom. Our after-tax earnings from joint ventures were reduced by $8 million in each of fiscal 2007 and 2006 for our share of the restructuring costs, primarily accelerated depreciation and severance. Our cumulative investment in these joint ventures was $295 million at the end of fiscal 2007 and $186 million at the end of fiscal Our investments in these joint ventures include aggregate advances of $158 million as of May 27, 2007 and $48 million as of May 28, Our sales to these joint ventures were $32 million in fiscal 2007, $35 million in fiscal 2006, and $47 million in fiscal We made net investments in the joint ventures of $103 million in fiscal 2007, $7 million in fiscal 2006, and $15 million in fiscal We received dividends from the joint ventures of $45 million in fiscal 2007, $77 million in fiscal 2006, and $83 million in fiscal Summary combined financial information for the joint ventures (including income statement information for SVE through the date of its termination on February 28, 2005) on a 100 percent basis follows: NOTE 6 Goodwill and Other Intangible Assets The components of goodwill and other intangible assets are as follows: May 27, 2007 May 28, 2006 In Millions Goodwill $ 6,835 $ 6,652 Other intangible assets: Intangible assets not subject to amortization: Brands 3,682 3,595 Intangible assets subject to amortization: Patents, trademarks and other finite-lived intangibles Less accumulated amortization (7) (7) Total intangible assets subject to amortization Total other intangible assets 3,694 3,607 Total goodwill and other intangible assets $10,529 $10,259 In Millions, Fiscal Year Net sales $2,016 $1,796 $2,652 Gross margin ,184 Earnings before income taxes Earnings after income taxes May 27, 2007 May 28, 2006 In Millions Current assets $ 815 $634 Noncurrent assets Current liabilities 1, Noncurrent liabilities 82 6

68 66 The changes in the carrying amount of goodwill for fiscal 2005, 2006, and 2007 are as follows: Bakeries and Foodservice Joint Ventures In Millions U.S. Retail International Total Balance as of May 30, 2004 $5,024 $126 $1,205 $329 $6,684 Acquisitions 1 1 Other activity, including translation (22) 25 (4) (1) Balance as of May 29, , , ,684 Acquisitions Deferred tax adjustment related to Pillsbury acquisition (42) (42) Other activity, primarily translation (29) 24 (5) Balance as of May 28, , , ,652 Reclassification for customer shift 216 (216) Acquisitions Deferred tax adjustment resulting from tax audit settlement Divestitures (7) (7) Other activity, primarily translation 14 (19) Balance as of May 27, 2007 $5,203 $146 $ 979 $507 $6,835 During fiscal 2007 as part of our annual goodwill and brand intangible impairment assessments, we reviewed our goodwill and other intangible asset allocations by country within the International segment and our joint ventures. The resulting reallocation of these balances across the countries within this segment and to our joint ventures caused changes in the foreign currency translation of the balances. As a result of these changes in foreign currency translation, we increased goodwill by $136 million, other intangible assets by $18 million, deferred income taxes by $9 million, and accumulated other comprehensive income (loss) by the net of these amounts. At the beginning of fiscal 2007, we shifted selling responsibility for several customers from our Bakeries and Foodservice segment to our U.S. Retail segment. Goodwill of $216 million previously reported in our Bakeries and Foodservice segment as of May 28, 2006 has now been recorded in the U.S. Retail segment. The changes in the carrying amount of other intangible assets for fiscal 2005, 2006, and 2007 are as follows: In Millions U.S. Retail International Joint Ventures Total Balance as of May 30, 2004 $3,200 $341 $14 $3,555 Other activity, including translation (22) (1) (23) Balance as of May 29, , ,532 Other activity, including translation (3) 79 (1) 75 Balance as of May 28, , ,607 Other intangibles acquired Other activity, including translation Balance as of May 27, 2007 $3,175 $461 $58 $3,694 Future purchase price adjustments to goodwill may occur upon the resolution of certain income tax accounting matters. See Note 14 on pages 80 and 81. Intangibles arising from recent acquisitions are subject to change pending final determination of fair values. NOTE 7 Financial Instruments and Risk Management Activities FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, receivables, accounts payable, other current liabilities, and notes payable approximate fair value. Marketable securities are carried at fair value. As of May 27, 2007, a comparison of cost and market values of our marketable debt and equity securities is as follows: Market Value Gross Gains Gross Losses In Millions Cost Available for sale: Debt securities $18 $18 $ $ Equity securities Total $22 $28 $6 $ Earnings include realized gains from sales of availablefor-sale marketable securities of less than $1 million in fiscal 2007, $1 million in fiscal 2006, and $2 million in fiscal Gains and losses are determined by specific identification. Classification of marketable securities as current or non-current is dependent upon management s intended holding period, the security s maturity date, or both. The

69 67 aggregate unrealized gains and losses on available-for-sale securities, net of tax effects, are classified in accumulated other comprehensive income (loss) within stockholders equity. Scheduled maturities of our marketable securities are as follows: Available for Sale In Millions Cost Market Value Under 1 year (current) $ 7 $ 7 From1to3years 2 2 From4to7years 3 3 Over 7 years 6 6 Equity securities 4 10 Total $22 $28 Cash, cash equivalents, and marketable securities totaling $24 million as of May 27, 2007, and $48 million as of May 28, 2006, were pledged as collateral. These assets are primarily pledged as collateral for certain derivative contracts. The fair values and carrying amounts of long-term debt, including the current portion, were $4,978 million and $4,952 million as of May 27, 2007, and $4,566 million and $4,546 million as of May 28, The fair value of long-term debt was estimated using discounted cash flows based on our current incremental borrowing rates for similar types of instruments. RISK MANAGEMENT ACTIVITIES As a part of our ongoing operations, we are exposed to market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices. To manage these risks, we may enter into various derivative transactions (e.g., futures, options, and swaps) pursuant to our established policies. Interest Rate Risk We are exposed to interest rate volatility with regard to future issuances of fixed-rate debt, and existing and future issuances of variable-rate debt. Primary exposures include U.S. Treasury rates, London Interbank Offered Rates (LIBOR), and commercial paper rates in the United States and Europe. We use interest rate swaps and forwardstarting interest rate swaps to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed- versus floatingrate debt, based on current and projected market conditions. Generally under these swaps, we agree with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed notional principal amount. Variable Interest Rate Exposures Except as discussed below, variable-to-fixed interest rate swaps are accounted for as cash flow hedges, as are all hedges of forecasted issuances of debt. Effectiveness is assessed based on either the perfectly effective hypothetical derivative method or changes in the present value of interest payments on the underlying debt. Amounts deferred to accumulated other comprehensive income (loss) are reclassified into earnings over the life of the associated debt. The amount of hedge ineffectiveness was less than $1 million in each of fiscal 2007, 2006, and Fixed Interest Rate Exposures Fixed-to-variable interest rate swaps are accounted for as fair value hedges with effectiveness assessed based on changes in the fair value of the underlying debt, using incremental borrowing rates currently available on loans with similar terms and maturities. Effective gains and losses on these derivatives and the underlying hedged items are recorded as interest expense. The amount of hedge ineffectiveness was less than $1 million in each of fiscal 2007, 2006, and In anticipation of the Pillsbury acquisition and other financing needs, we entered into pay-fixed interest rate swap contracts during fiscal 2001 and 2002 totaling $7.1 billion to lock in our interest payments on the associated debt. As of May 27, 2007, we still owned $1.75 billion of Pillsburyrelated pay-fixed swaps that were previously neutralized with offsetting pay-floating swaps in fiscal In advance of a planned debt financing in fiscal 2007, we entered into $700 million pay-fixed, forward-starting interest rate swaps with an average fixed rate of 5.7 percent. All of these forward-starting interest rate swaps were cash settled for $23 million coincident with our $1.0 billion 10-year fixedrate note debt offering on January 17, As of May 27, 2007, $22 million pre-tax remained in accumulated other comprehensive income (loss), which will be reclassified to earnings over the term of the underlying debt. The following table summarizes the notional amounts and weighted average interest rates of our interest rate swaps. As discussed above, we have neutralized all of our pay-fixed swaps with pay-floating swaps; however, we cannot present them on a net basis in the following table because the offsetting occurred with different counterparties. Average variable rates are based on rates as of the end of the reporting period. May 27, 2007 May 28, 2006 Dollars In Millions Pay-floating swaps notional amount $1,914 $3,770 Average receive rate 5.8% 4.8% Average pay rate 5.3% 5.1% Pay-fixed swaps notional amount $1,762 $3,250 Average receive rate 5.3% 5.1% Average pay rate 7.3% 6.8%

70 68 The swap contracts mature at various dates from 2008 to 2016 as follows: In Millions Fiscal Year Maturity Date Pay Floating Pay Fixed 2008 $ 22 $ ,766 1,012 Beyond Total $1,914 $1,762 Foreign Exchange Risk Foreign currency fluctuations affect our net investments in foreign subsidiaries and foreign currency cash flows related primarily to third-party purchases, intercompany loans, and product shipments. We are also exposed to the translation of foreign currency earnings to the U.S. dollar. Our principal exposures are to the Australian dollar, British pound sterling, Canadian dollar, Euro, and Mexican peso. We primarily use foreign currency forward contracts to selectively hedge our foreign currency cash flow exposures. We generally do not hedge more than 12 months forward. The amount of hedge ineffectiveness was $1 million or less in each of fiscal 2007, 2006, and We also have many net investments in foreign subsidiaries that are denominated in Euros. We hedge a portion of these net investments by issuing Euro-denominated commercial paper. As of May 27, 2007, we have issued $402 million of Eurodenominated commercial paper that we designated as a net investment hedge and thus deferred net foreign currency transaction losses of $27 million to accumulated other comprehensive income (loss). Commodity Price Risk Many commodities we use in the production and distribution of our products are exposed to market price risks. We utilize derivatives to hedge price risk for our principal raw materials and energy input costs including grains (wheat, oats, and corn), oils (principally soybean), non-fat dry milk, natural gas, and diesel fuel. We also operate a grain merchandising operation. This operation uses futures and options to hedge its net inventory position to minimize market exposure. We manage our exposures through a combination of purchase orders, long-term contracts with suppliers, exchange-traded futures and options, and over-the-counter options and swaps. We offset our exposures based on current and projected market conditions, and generally seek to acquire the inputs at as close to our planned cost as possible. The amount of hedge ineffectiveness was a loss of $1 million in fiscal 2007, a gain of $3 million in fiscal 2006, and a loss of $1 million in fiscal Other Risk Management Activities We enter into certain derivative contracts in accordance with our risk management strategy that do not meet the criteria for hedge accounting, including those in our grain merchandising operation, certain foreign currency derivatives, and offsetting interest rate swaps as discussed above. Although they may not qualify as hedges for accounting purposes, these derivatives have the economic impact of largely mitigating the associated risks. These derivatives were not acquired for trading purposes and are recorded at fair value with changes in fair value recognized in net earnings each period. Unrealized losses from interest rate cash flow hedges recorded in accumulated other comprehensive income (loss) as of May 27, 2007, totaled $47 million after tax, primarily related to interest rate swaps we entered into in contemplation of future borrowings and other financing requirements (primarily related to the Pillsbury acquisition), which are being reclassified into interest expense over the lives of the hedged forecasted transactions. As of May 27, 2007, $17 million of after-tax unrealized gains from commodity derivatives were recorded in accumulated other comprehensive income (loss). Unrealized losses from cash flow hedges recorded in accumulated other comprehensive income (loss) as of May 27, 2007, were $6 million after-tax from foreign currency cash flow hedges. The net amount of pre-tax gains and losses in accumulated other comprehensive income (loss) as of May 27, 2007, that is expected to be reclassified into net earnings within the next 12 months is $1 million in expense. See Note 8 for the impact of these reclassifications on interest expense. CONCENTRATIONS OF CREDIT RISK We enter into interest rate, foreign exchange, and certain commodity and equity derivatives, primarily with a diversified group of highly rated counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and, by policy, limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the credit risk of nonperformance by these counterparties; however, we have not incurred a material loss and do not anticipate incurring any such material losses. We also enter into commodity futures transactions through various regulated exchanges. During fiscal 2007, Wal-Mart Stores, Inc. and its affiliates (Wal-Mart), accounted for 20 percent of our consolidated net sales and 27 percent of our sales in the U.S. Retail segment. No other customer accounted for 10 percent or more of our consolidated net sales. Wal-Mart also represented 5 percent of our sales in the International segment and 6 percent of our sales in the Bakeries and Foodservice segment. As of May 27, 2007, Wal-Mart accounted for 20 percent of our receivables invoiced in the U.S. Retail segment,

71 69 3 percent of our receivables invoiced in the International segment and 3 percent of our receivables invoiced in the Bakeries and Foodservice segment. The 5 largest customers in our U.S. Retail segment accounted for 54 percent of its fiscal 2007 net sales, the 5 largest customers in our International segment accounted for 41 percent of its fiscal 2007 net sales, and the 5 largest customers in our Bakeries and Foodservice segment accounted for 40 percent of its fiscal 2007 net sales. NOTE 8 Debt NOTES PAYABLE The components of notes payable and their respective weighted-average interest rates at the end of the periods were as follows: Dollars In Millions May 27, 2007 May 28, 2006 Notes Payable Weighted- Average Interest Rate Notes Payable Weighted- Average Interest Rate U.S. commercial paper $ % $ % Euro commercial paper Financial institutions Total notes payable $1, % $1, % To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding short-term borrowings. Our commercial paper borrowings are supported by $2.95 billion of fee-paid committed credit lines and $351 million in uncommitted lines. As of May 27, 2007, there were no amounts outstanding on the fee-paid committed credit lines and $133 million was drawn on the uncommitted lines, all by our international operations. Our committed lines consist of a $1.1 billion credit facility expiring in October 2007, a $750 million credit facility expiring in January 2009, and a $1.1 billion credit facility expiring in October LONG-TERM DEBT On April 25, 2007, we redeemed or converted all of our zero coupon convertible debentures due 2022 for a redemption price equal to the accreted value of the debentures, which was $ per $1,000 principal amount of the debentures at maturity. The redemption price was settled in cash. For the debentures that were converted, we delivered cash equal to the accreted value of the debentures, including $23 million of accreted original issue discount, and issued 284,000 shares of our common stock worth $17 million to settle the conversion value in excess of the accreted value. This premium was recorded as a reduction to stockholders equity, net of the applicable tax benefit. There was no gain or loss associated with the redemption or conversions. We used proceeds from the issuance of commercial paper to fund the redemption and conversions of the debentures. During fiscal 2006, we repurchased a significant portion of these debentures pursuant to put rights of the holders for an aggregate purchase price of $1.33 billion, including $77 million of accreted original issue discount. We incurred no gain or loss from this repurchase. We used proceeds from the issuance of commercial paper to fund the purchase price of the debentures. On April 11, 2007, we issued $1.15 billion aggregate principal amount of floating rate convertible senior notes. The notes bear interest at an annual rate equal to one-month LIBOR minus 0.07 percent, subject to monthly reset, provided that such rate will never be less than zero percent per annum. Interest on the notes is payable quarterly in arrears, beginning July 11, The notes will mature on April 11, Each $1,000 note is convertible into ten shares of our common stock, subject to adjustment in certain circumstances, on any business day prior to maturity. Upon conversion, each holder would receive cash up to the calculated principal amount of the note, and cash or shares at our option for any excess conversion value over the calculated principal amount of each note as described in the note agreement. The notes are unsecured and unsubordinated. The holders of the notes may put them to us for cash equal to the principal amount plus accrued and unpaid interest upon any change of control and on April 11, 2008, 2009, 2012, 2017, 2022, 2027, and We also have the right to call the notes for cash equal to the principal amount plus accrued and unpaid interest on any date on or after April 11, We must make at least four quarterly interest payments before calling the notes. We used the proceeds from the notes to repay outstanding commercial paper. Our policy is to cashsettle the full principal amount of convertible instruments. These notes did not have a dilutive effect on our EPS in fiscal In January 2007, we issued $1.0 billion of 5.7 percent fixed rate notes due February 15, 2017 and $500 million of floating rate notes due January 22, The proceeds of these notes were used to retire $1.5 billion of fixed rate notes that matured in February The floating rate notes bear interest equal to three-month LIBOR plus 0.13 percent, subject to quarterly reset. Interest on the floating rate notes is payable quarterly in arrears. The floating rate notes cannot be called by us prior to maturity. Interest on the fixed rate notes is payable semi-annually in arrears. The fixed rate notes may be called by us at any time for cash equal to the greater of the principal amounts of the notes and a specified makewhole amount, plus, in each case, accrued and unpaid interest. The notes are senior unsecured obligations. We had previously entered into $700 million of pay-fixed, forwardstarting interest rate swaps with an average fixed rate of 5.7 percent in anticipation of the fixed rate note refinancing. We are amortizing a $23 million pre-tax loss deferred to accumulated other comprehensive income (loss) associated with

72 70 these derivatives to interest expense on a straight-line basis over the life of the fixed rate notes. We expect to reclassify $2 million pre-tax of the deferred loss to net earnings over the next 12 months. Our credit facilities, certain of our long-term debt agreements, and our minority interests contain restrictive covenants. As of May 27, 2007, we were in compliance with all of these covenants. In fiscal 2005, we commenced a cash tender offer for our outstanding 6 percent notes due in The tender offer resulted in the purchase of $500 million principal amount of the notes. Subsequent to the expiration of the tender offer, we purchased an additional $260 million principal amount of the notes in the open market. We incurred a loss of $137 million from this repurchase. As of May 27, 2007, the $74 million pre-tax recorded in accumulated other comprehensive income (loss) associated with our previously designated interest rate swaps will be reclassified to interest expense over the remaining lives of the hedged forecasted transaction. The amount expected to be reclassified from accumulated other comprehensive income (loss) to interest expense in fiscal 2008 is $15 million pre-tax. The amount reclassified from accumulated other comprehensive income (loss) in fiscal 2007 was $34 million pre-tax. A summary of our long-term debt is as follows: May 27, 2007 May 28, 2006 In Millions 6% notes due February 15, 2012 $ 1,240 $ 1,240 Floating rate convertible senior notes due April 11, 2037 (a) 1, % notes due February 15, ,000 Floating rate notes due January 22, % notes due November 30, Medium-term notes, 4.8% to 9.1%, due 2006 to 2078 (b) % notes due November 30, Zero coupon notes, yield 11.1%, $261 due August 15, Debt of contract manufacturer consolidated under FIN 46R % ESOP loan guaranty, due June 30, % notes due February 15, , % notes due October 24, Zero coupon convertible debentures yield 2.0%, $371 due October 28, Other ,952 4,546 Less amount due within one year (a)(b) (1,734) (2,131) Total Long-term debt $ 3,218 $ 2,415 (a) $1,150 million of our floating rate convertible senior notes may mature in fiscal 2008 based on the put rights of the note holders. (b) $100 million of our medium-term notes may mature in fiscal 2008 based on the put rights of the note holders. We guaranteed the debt of our Employee Stock Ownership Plan. Therefore, the guaranteed debt is reflected on our Consolidated Balance Sheets as long-term debt, with a related offset in additional paid-in capital in stockholders equity. The debt underlying the guarantee was repaid on June 30, Principal payments due on long-term debt in the next five years based on stated contractual maturities or put rights of certain note holders are $1,734 million in fiscal 2008, $315 million in fiscal 2009, $507 million in fiscal 2010, $8 million in fiscal 2011, and $1,249 million in fiscal 2012.

73 71 NOTE 9 Minority Interests Third parties hold minority interests in certain of our subsidiaries. We contributed assets with an aggregate fair market value of $4 billion to our subsidiary, General Mills Cereals, LLC (GMC). GMC is a separate and distinct legal entity from us and our other subsidiaries. The contributed assets consist primarily of manufacturing assets and intellectual property associated with the production and retail sale of Big G readyto-eat cereals, Progresso soups, and Old El Paso products. In exchange for the contribution of these assets, GMC issued the managing membership interest and preferred membership interests to our wholly owned subsidiaries.we hold all managing member interests, direct the business activities and operations of GMC, and have fiduciary responsibilities to GMC and its members. Other than rights to vote on certain matters, holders of the preferred membership interests have no right to direct the management of GMC. In May 2002, we sold 150,000 Class A preferred membership interests in GMC to an unrelated third-party investor in exchange for $150 million. In June 2007, we sold an additional 88,851 Class A preferred membership interests in GMC to the same unrelated third-party investor in exchange for $92 million. In October 2004, we sold 835,000 Series B-1 preferred membership interests in GMC to an unrelated third-party investor in exchange for $835 million. The terms of the Series B-1 and Class A interests held by the third-party investors and the rights of those investors are detailed in the Third Amended and Restated Limited Liability Company Agreement of GMC (the LLC Agreement). Currently, we hold all interests in GMC (including all managing member interests), other than the Class A interests and the Series B-1 interests. The Class A interests receive quarterly preferred distributions based on their capital account balance at a floating rate equal to the sum of three-month LIBOR plus 65 basis points. The LLC Agreement requires that the rate of the distributions on the Class A interests be adjusted by agreement between the Class A interests holder and GMC, or through a remarketing, every five years. The first adjustment of the rate occurred in June 2007 and the next adjustment is scheduled to occur in June GMC, through its managing member, may elect to repurchase all of the Class A interests at any time for an amount equal to the holder s capital account, plus any unpaid preferred returns and any applicable make-whole amount. Upon a failed remarketing, the rate over LIBOR will be increased by 75 basis points until the next scheduled remarketing, which will occur in 3 month intervals until a successful remarketing. As of May 27, 2007, the capital account balance of the Class A interests held by unrelated third parties was $150 million, and was $248 million as of June 28, 2007, reflecting the third party s purchase of $92 million of additional Class A interests and a $6 million increase in the capital account associated with the previously owned interests. GMC may be required to be dissolved and liquidated under certain circumstances, including, without limitation, the bankruptcy of GMC or its subsidiaries; GMC s failure to deliver the preferred distributions; GMC s failure to comply with portfolio requirements; breaches of certain covenants; lowering of our senior debt rating below either Baa3 by Moody s Investors Service (Moody s) or BBB- by Standard & Poor s (S&P); and a failed attempt to remarket the Class A interests as a result of a breach of GMC s obligations to assist in such remarketing. In the event of a liquidation of GMC, each member of GMC would receive the amount of its then current capital account balance. The managing member may avoid liquidation in most circumstances by exercising its option to purchase the Class A interests. The Series B-1 interests are entitled to receive quarterly preferred distributions based on their capital account balance at a fixed rate of 4.5 percent per year, which is scheduled to be reset to a new fixed rate through a remarketing in August The capital account balance of the Series B-1 interests was $835 million as of May 27, 2007, and will be increased to $849 million in August Beginning in August 2012, we may elect to reset the preferred distribution rate through a remarketing or to repurchase the interests. If we do not conduct a remarketing or repurchase the interests, the preferred distribution rate will be reset to a floating rate. The managing member of GMC may elect to repurchase the Series B-1 interests for an amount equal to the holder s then current capital account balance in (i) August 2007 and in five year intervals thereafter, and (ii) on any distribution date during a period in which the preferred return is set at a floating rate. GMC is not required to purchase the Series B-1 interests, and the holders of the Series B-1 interests cannot require us to purchase the interests. The Series B-1 interests will be exchanged for shares of our perpetual preferred stock upon the occurrence of any of the following events: our senior unsecured debt rating falling below either Ba3 as rated by Moody s or BB- as rated by S&P or Fitch Ratings; our bankruptcy or liquidation; a default on any of our senior indebtedness resulting in an acceleration of indebtedness having an outstanding principal balance in excess of $50 million; failing to pay a dividend on our common stock in any fiscal quarter; or certain liquidating events described in the LLC Agreement. If GMC fails to make a required distribution to the holders of Series B-1 interests when due, we will be restricted from paying any dividend (other than dividends in the form of shares of common stock) or other distributions on shares

74 72 of our common or preferred stock, and may not repurchase or redeem shares of our common or preferred stock, until all such accrued and undistributed distributions are paid to the holders of the Series B-1 interests. If the required distributions on the Series B-1 interests remain undistributed for six quarterly distribution periods, the managing member will form a nine-member board of directors to manage GMC. Under these circumstances, the holder of the Series B-1 interests will have the right to appoint one director. Upon the payment of the required distributions, the GMC board of directors will be dissolved. As of May 27, 2007, we have made all required distributions to holders of the Series B-1 interests. Upon the occurrence of certain events, the Series B-1 interests will be included in our computation of diluted earnings per share as a participating security. For financial reporting purposes, the assets, liabilities, results of operations, and cash flows of GMC are included in our Consolidated Financial Statements. The return to the third party investors is reflected in interest, net in the Consolidated Statements of Earnings. The third party investors Class A and Series B-1 interests in GMC are classified as minority interests on our Consolidated Balance Sheets. We may also call these instruments in exchange for a payment equal to the then-current capital account value, plus any unpaid preferred return and any applicable make-whole amount. We may only call the Series B-1 interests in connection with a scheduled remarketing or on distribution dates in the event of a floating rate period. If we repurchase these interests, any change in the unrelated third party investors capital accounts from their original value will be charged directly to retained earnings and will increase or decrease the net earnings used to calculate earnings per share in that period. GM Capital was formed for the purpose of purchasing and collecting our receivables and previously sold $150 million of its Series A preferred stock to an unrelated thirdparty investor. In June 2007, we repurchased all of the Series A preferred stock. We used commercial paper borrowings and proceeds from the sale of the additional interests in GMC to fund the repurchase. NOTE 10 Stockholders Equity Cumulative preference stock of 5 million shares, without par value, is authorized but unissued. In fiscal 2007, our Board of Directors approved a new authorization to repurchase up to 75 million shares of our common stock. This replaces a prior authorization, which permitted us to repurchase shares up to a treasury share balance of 170 million. Purchases under the new authorization can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans, and accelerated repurchase programs. The authorization has no pre-established termination date. During fiscal 2007, we repurchased 25 million shares for an aggregate purchase price of $1.4 billion, of which $64 million settled after the end of our fiscal year. In fiscal 2006, we repurchased 19 million shares of common stock for an aggregate purchase price of $892 million. A total of 162 million shares were held in treasury as of May 27, In October 2004, we purchased 17 million shares of our common stock from Diageo plc (Diageo) for $750 million, or $45.20 per share. This share repurchase was made in conjunction with Diageo s sale of 33 million additional shares of our common stock in an underwritten public offering. Concurrently in October 2004, Lehman Brothers Holdings Inc. (Lehman Brothers) issued $750 million of notes, which are mandatorily exchangeable for shares of our common stock. In connection with the issuance of those notes, an affiliate of Lehman Brothers entered into a forward purchase contract with us, under which we are obligated to deliver to such affiliate between 14 million and 17 million shares of our common stock, subject to adjustment under certain circumstances. These shares will be deliverable by us in October 2007, in exchange for $750 million of cash assuming the Series B-1 interests in GMC are remarketed as planned. If the remarketing is not successful, we will receive securities of an affiliate of Lehman Brothers. The forward purchase contract is considered an equity instrument. The $43 million fee we paid for the forward purchase contract was recorded as a reduction to stockholders equity.

75 73 The following table provides details of other comprehensive income: Pretax Change Tax (Expense) Benefit Other Comprehensive Income In Millions Fiscal 2005: Foreign currency translation $ 75 $ $ 75 Minimum pension liability (35) 13 (22) Other fair value changes: Securities 2 (1) 1 Hedge derivatives (30) 11 (19) Reclassifications to earnings: Securities (2) 1 (1) Hedge derivatives 187 (69) 118 Other comprehensive income $197 $(45) $152 Fiscal 2006: Foreign currency translation $ 73 $ $ 73 Minimum pension liability 38 (14) 24 Other fair value changes: Securities 2 (1) 1 Hedge derivatives (13) 5 (8) Reclassifications to earnings: Hedge derivatives 44 (17) 27 Other comprehensive income $144 $(27) $117 Fiscal 2007: Foreign currency translation $194 $ $194 Minimum pension liability (33) 12 (21) Other fair value changes: Securities 2 (1) 1 Hedge derivatives 12 (5) 7 Reclassifications to earnings: Hedge derivatives 22 (8) 14 Other comprehensive income $197 $ (2) $195 Except for reclassifications to earnings, changes in other comprehensive income are primarily noncash items. Accumulated other comprehensive income (loss) balances, net of tax effects, were as follows: May 27, 2007 May 28, 2006 In Millions Foreign currency translation adjustments $ 402 $208 Unrealized gain (loss) from: Securities 3 2 Hedge derivatives (36) (57) Minimum pension liability (49) (28) Impact of adoption of SFAS 158 (440) Accumulated other comprehensive income (loss) $(120) $125 NOTE 11 Stock Plans We use broad-based stock plans to help ensure management s alignment with our stockholders interests. As of May 27, 2007, a total of 8,679,385 shares were available for grant in the form of stock options, restricted shares, restricted stock units, and shares of common stock under the 2005 Stock Compensation Plan (2005 Plan) through December 31, 2007, and the 2006 Compensation Plan for Nonemployee Directors (2006 Director Plan) through September 30, Restricted shares and restricted stock units may also be granted under the Executive Incentive Plan (EIP) through September 25, Stock-based awards now outstanding include some granted under the 1990, 1993, 1995, 1996, 1998 (senior management), 1998 (employee), 2001, and 2003 stock plans, under which no further awards may be granted. The stock plans provide for full vesting of options, restricted shares, and restricted stock units upon completion of specified service periods or in the event of a change of control. As of May 27, 2007, a total of 4,785,881 restricted shares and restricted stock units were outstanding under all plans. The weighted-average grant-date fair values of the employee stock options granted were estimated as $10.74 in fiscal 2007, $8.04 in fiscal 2006, and $8.32 in fiscal 2005 using the Black-Scholes option-pricing model with the following assumptions: Fiscal Year Risk-free interest rate 5.3% 4.3% 4.0% Expected term 8 years 7 years 7 years Expected volatility 19.7% 20.0% 21.0% Dividend yield 2.8% 2.9% 2.7% The valuation of stock options is a significant accounting estimate which requires us to use significant judgments and assumptions that are likely to have a material impact on our financial statements. Annually, we make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. For fiscal 2007 and all prior periods, our estimate of expected stock price volatility is based on historical volatility determined on a daily basis over the expected term of the options. We considered but did not use implied volatility because we believed historical volatility provided an appropriate expectation for our volatility in the future. Our expected term represents the period of time that options granted are expected to be outstanding based on historical data to estimate option exercise and employee termination within the valuation model. Separate groups of employees have similar historical exercise behavior and therefore were aggregated into a single pool for valuation purposes. The weighted-average expected term for all employee groups

76 74 is presented in the table above. Our valuation model assumes that dividends and our share price increase in line with earnings, resulting in a constant dividend yield. The risk-free interest rate for periods during the expected term of the options is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant. SFAS 123R also provides that any corporate income tax benefit realized upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a windfall tax benefit ) is presented in the Consolidated Statement of Cash Flows as a financing (rather than an operating) cash flow. If this standard had been adopted in fiscal 2006, operating cash flow would have been lower (and financing cash flow would have been higher) by $41 million as a result of this provision. For fiscal 2007, the windfall tax benefits classified as financing cash flow were $73 million. For balance sheet classification purposes, realized windfall tax benefits are credited to additional paid-in capital within the Consolidated Balance Sheet. Realized shortfall tax benefits (amounts which are less than that previously recognized in earnings) are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense, potentially resulting in volatility in our consolidated effective income tax rate. Under the transition rules for adopting SFAS 123R using the modified prospective method, we were permitted to calculate a cumulative memo balance of windfall tax benefits from post-1995 fiscal years for the purpose of accounting for future shortfall tax benefits. STOCK OPTIONS Options may be priced at 100 percent or more of the fair market value on the date of grant, and generally vest four years after the date of grant. Options generally expire within 10 years and one month after the date of grant. Under the 2006 Director Plan, each nonemployee director receives upon election and re-election to the Board of Directors options to purchase 10,000 shares of common stock that generally vest one year, and expire within 10 years, after the date of grant. Information on stock option activity follows: Options Exercisable (Thousands) Weighted- Average Exercise Price per Share Options Outstanding (Thousands) Weighted- Average Exercise Price per Share Balance as of May 30, ,191 $ ,113 $38.97 Granted 4, Exercised (8,334) Expired (1,064) Balance as of May 29, ,506 $ ,259 $40.68 Granted (a) Exercised (5,572) Expired (620) Balance as of May 28, ,071 $ ,203 $41.45 Granted 5, Exercised (9,382) Expired (333) Balance as of May 27, ,506 $ ,773 $43.09 (a) In fiscal 2005, we changed the timing of our annual stock option grant from December to June. As a result, we did not make an annual stock option grant during fiscal 2006.

77 75 Stock-based compensation expense related to stock option awards was $54 million in fiscal RESTRICTED STOCK AND RESTRICTED STOCK UNITS Stock and units settled in stock subject to a restricted period and a purchase price, if any (as determined by the Compensation Committee of the Board of Directors), may be granted to key employees under the 2005 Plan. Restricted shares and restricted stock units, up to 50 percent of the value of an individual s cash incentive award, may also be granted through the EIP. Certain restricted stock and restricted stock unit awards require the employee to deposit personally owned shares (on a one-for-one basis) with us during the restricted period. Restricted stock and restricted stock units generally vest and become unrestricted four years after the date of grant. Participants are entitled to cash dividends on such awarded shares and units, but the sale or transfer of these shares and units is restricted during the vesting period. Participants holding restricted stock, but not restricted stock units, are entitled to vote on matters submitted to holders of common stock for a vote. Under the 2006 Director Plan, each nonemployee director receives 1,000 restricted stock units each time he or she is elected to the Board. These units generally vest one year after the date of grant. Information on restricted stock unit activity follows: Units (Thousands) Weighted-Average Grant-Date Fair Value Non-vested as of May 28, ,672 $46.87 Granted 1,771 $51.71 Vested (497) $45.69 Forfeited (160) $48.29 Non-vested as of May 27, ,786 $48.74 Fiscal Year Number of units granted (thousands) (a) 1, ,497 Weighted-average price per unit $51.71 $49.75 $46.73 (a) In fiscal 2005, we changed the timing of our annual restricted stock unit grant from December to June. The total grant-date fair value of restricted stock unit awards that vested during fiscal 2007 was $23 million. The total grant-date fair value of restricted stock unit awards that vested during fiscal 2006 was $32 million. As of May 27, 2007, unrecognized compensation costs related to non-vested stock options and restricted stock units was $150 million. This cost will be recognized as a reduction of earnings over 23 months, on average. Stock-based compensation expense related to restricted stock awards was $74 million for fiscal 2007, $45 million for fiscal 2006, and $38 million for fiscal NOTE 12 Earnings Per Share Basic and diluted earnings per share were calculated using the following: In Millions, Except per Share Data, Fiscal Year Net earnings as reported $1,144 $1,090 $1,240 Interest on zero coupon contingently convertible debentures, after tax (a) 9 20 Net earnings for diluted earnings per share calculation $1,144 $1,099 $1,260 Average number of common shares basic earnings per share Incremental share effect from: Stock options (b) Restricted stock and restricted stock units (b) Forward purchase contract 1 Zero coupon contingently convertible debentures (a) Average number of common shares diluted earnings per share Earnings per share Basic $ 3.30 $ 3.05 $ 3.34 Earnings per share Diluted $ 3.18 $ 2.90 $ 3.08 (a) Shares from contingently convertible debentures are reflected using the if-converted method. On December 12, 2005, we completed a consent solicitation and entered into a supplemental indenture related to our zero coupon convertible debentures. We also made an irrevocable election: (i) to satisfy all future obligations to repurchase debentures solely in cash and (ii) to satisfy all future conversions of debentures (a) solely in cash up to an amount equal to the accreted value of the debentures and (b) at our discretion, in cash, stock, or a combination of cash and stock to the extent the conversion value of the debentures exceeds the accreted value.as a result of these actions, no shares of common stock underlying the debentures were considered outstanding after December 12, 2005, for purposes of calculating our diluted earnings per share. All outstanding debentures were redeemed or converted as of April 25, (b) Incremental shares from stock options, restricted stock, and restricted stock units are computed by the treasury stock method. The diluted earnings per share calculation does not include potential common shares of 6 million in fiscal 2007, 8 million in fiscal 2006, and 9 million in fiscal 2005 that were considered anti-dilutive.

78 76 NOTE 13 Retirement and Postemployment Benefits DEFINED BENEFIT PENSION PLANS We have defined benefit pension plans covering most domestic, Canadian, and United Kingdom employees. Benefits for salaried employees are based on length of service and final average compensation. Benefits for hourly employees include various monthly amounts for each year of credited service. Our funding policy is consistent with the requirements of applicable laws. We made $11 million of voluntary contributions to these plans in fiscal Our principal domestic retirement plan covering salaried employees has a provision that any excess pension assets would vest in plan participants if the plan is terminated within five years of a change in control. OTHER POSTRETIREMENT BENEFIT PLANS We sponsor plans that provide health-care benefits to the majority of our domestic and Canadian retirees. The salaried health care benefit plan is contributory, with retiree contributions based on years of service. We fund related trusts for certain employees and retirees on an annual basis and made $50 million of voluntary contributions to these plans in fiscal Assumed health care cost trend rates are as follows: Fiscal Year Health care cost trend rate for next year 10.0% and 11.0% 10.0% and 11.0% Rate to which the cost trend rate is assumed to decline (ultimate rate) 5.2% 5.2% Year that the rate reaches the ultimate trend rate (a) 2014/ /2014 (a) The year the ultimate trend rate is reached is 2014 for plan participants under age 65 and 2015 for plan participants greater than 65 yearsofage. A one percentage point change in the health care cost trend rate would have the following effects: One Percentage Point Increase One Percentage Point Decrease In Millions Effect on the aggregate of the service and interest cost components in fiscal 2008 $ 7 $ (7) Effect on the other postretirement accumulated benefit obligation as of May 27, (78) We review our health care trend rates annually. Our review is based on data and information we collect about our health care claims experience and information provided by our actuaries. This information includes recent plan experience, plan design, overall industry experience and projections, and assumptions used by other similar organizations. Our initial health care cost trend rate is adjusted as necessary to remain consistent with this review, recent experiences, and short term expectations. Our current health care cost trend rate assumption is 11 percent for retirees age 65 and over and 10 percent for retirees under age 65. These rates are graded down annually until the ultimate trend rate of 5.2 percent is reached in 2015 for retirees over age 65 and 2014 for retirees under age 65. The trend rates are applicable for calculations only if the retirees benefits increase as a result of health care inflation. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Assumed trend rates for health care costs have an important effect on the amounts reported for the other postretirement benefit plans. We use our fiscal year end as a measurement date for all our defined benefit pension and other postretirement benefit plans. POSTEMPLOYMENT BENEFIT PLANS Under certain circumstances, we also provide accruable benefits to former or inactive employees in the United States, Canada, and Mexico and members of our Board of Directors, including severance, long-term disability, and certain other benefits payable upon death. We recognize an obligation for any of these benefits that vest or accumulate with service. Postemployment benefits that do not vest or accumulate with service (such as severance based solely on annual pay rather than years of service) are charged to expense when incurred. Our postemployment benefit plans are unfunded. Summarized financial information about defined benefit pension, other postretirement, and postemployment benefit plans is presented below. As of May 27, 2007, we changed to the Retirement Plans (RP) 2000 Mortality Table projected

79 77 forward to 2007 for calculating the fiscal 2007 year end defined benefit pension, other postretirement, and postemployment benefit plan obligation and fiscal 2008 expense. The impact of this change increased our defined benefit pension obligations by $2 million and had no impact on any of our other plans. The change also increased fiscal 2008 defined benefit pension expenses by $1 million. For fiscal 2006, the impact of plan amendments on the projected benefit obligation is primarily related to incremental benefits under agreements with the unions representing hourly workers at certain of our domestic cereal, dough, and foodservice plants covering the four-year period ending April 25, Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans In Millions, Fiscal Year (a) Change in Plan Assets: Fair value at beginning of year $3,620 $3,237 $ 329 $ 242 Actual return on assets Employer contributions Plan participant contributions Divestitures/acquisitions 2 Benefit payments (164) (154) (53) (55) Fair value at end of year $4,097 $3,594 $ 391 $ 329 Change in Projected Benefit Obligation: Benefit obligation at beginning of year $2,916 $3,082 $ 950 $ 971 $ 90 $ 47 Service cost Interest cost Plan amendment 31 (4) 15 Curtailment/other Plan participant contributions Medicare Part D reimbursements 6 Actuarial loss (gain) 244 (315) (5) (43) 1 Benefits payments from plans (164) (154) (54) (52) (17) (9) Projected benefit obligation at end of year $3,257 $2,888 $ 981 $ 950 $ 93 $ 77 Plan assets in excess of (less than) benefit obligation as of fiscal year-end $ 840 $ 706 $(590) $(621) $(93) $(77) Funded status as of May 26, 2006: Plan assets in excess of (less than) benefit obligation $ 706 $(621) $(77) Unrecognized net actuarial loss Unrecognized prior service cost (credit) 69 (14) 15 Net amount recognized $1,239 $(318) $(60) (a) Fiscal 2006 excludes certain international defined benefit pension plans. These plans had prepaid defined benefit pension assets of less than $1 million and accrued defined benefit pension plan liabilities of $4 million at the end of fiscal Pension expense associated with these plans was $3 million for fiscal The accumulated benefit obligation for all defined benefit plans was $3,007 million as of May 27, 2007 and $2,689 million as of May 28, Amounts recognized in accumulated other comprehensive income (loss) as of May 27, 2007, consist of: Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans In Millions Total Net actuarial loss $(281) $(166) $ (1) $(448) Prior service (cost) credit (39) 8 (10) (41) Amounts recorded in accumulated other comprehensive income (loss) $(320) $(158) $(11) $(489)

80 78 Plans with accumulated benefit obligations in excess of plan assets are as follows: Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans In Millions, Fiscal Year Projected benefit obligation $182 $173 N/A N/A N/A N/A Accumulated benefit obligation $981 $950 $ 93 $ 77 Plan assets at fair value Components of net periodic benefit (income) costs are as follows: Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans In Millions, Fiscal Year Service cost $ 73 $ 76 $ 62 $ 16 $ 18 $ 15 $ 5 $3 $2 Interest cost Expected return on plan assets (334) (323) (301) (27) (24) (22) Amortization of losses Amortization of prior service costs (credits) (2) (2) (2) 2 Other adjustments 20 Settlement or curtailment losses Net periodic benefit (income) costs $ (56) $ (38) $ (54) $ 61 $ 63 $ 60 $31 $4 $4 We expect to recognize the following amounts in net periodic benefit (income) costs in fiscal 2008: Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans In Millions Amortization of losses $22 $15 $ Amortization of prior service costs (credits) $ 8 $ (1) $2 ASSUMPTIONS Weighted-average assumptions used to determine benefit obligations are as follows: Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans Fiscal Year Discount rate 6.18% 6.45% 6.15% 6.50% 6.05% 6.44% Rate of salary increases Weighted-average assumptions used to determine net periodic benefit (income) costs are as follows: Defined Benefit Pension Plans Other Postretirement Benefit Plans Postemployment Benefit Plans Fiscal Year Discount rate 6.45% 5.55% 6.65% 6.50% 5.50% 6.65% 6.44% 5.55% 6.65% Rate of salary increases Expected long-term rate of return on plan assets Our discount rate assumptions are determined annually as of the last day of our fiscal year for all of the defined benefit pension, other postretirement, and postemployment benefit obligations. Those same discount rates also are used to determine defined benefit pension, other postretirement, and postemployment benefit income and expense for the following fiscal year. We work with our actuaries to determine the timing and amount of expected future cash outflows to plan participants and, using AA-rated corporate bond yields, to develop a forward interest rate curve, including a

81 79 margin to that index based on our credit risk. This forward interest rate curve is applied to our expected future cash outflows to determine our discount rate assumptions. Our expected rate of return on plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment services, and investment managers), and long-term inflation assumptions. We review this assumption annually for each plan, however, our annual investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return are revised only when our future investment performance based on our asset allocations, investment strategies, or capital markets change significantly. Weighted-average asset allocations for the past two fiscal years for our defined benefit pension and other postretirement benefit plans are as follows: Defined Benefit Pension Plans Other Postretirement Benefit Plans Fiscal Year Asset category: United States equities 29% 34% 34% 24% International equities Private equities Fixed income Real assets Total 100% 100% 100% 100% The investment objective for our domestic defined benefit pension and other postretirement benefit plans is to secure the benefit obligations to participants at a reasonable cost to us. Our goal is to optimize the long-term return on plan assets at a moderate level of risk. The defined benefit pension and other postretirement benefit plan portfolios are broadly diversified across asset classes. Within asset classes, the portfolios are further diversified across investment styles and investment organizations. For the defined benefit pension and other postretirement benefit plans, the longterm investment policy allocations are: 30 percent to equities in the United States, 20 percent to international equities, 10 percent to private equities, 30 percent to fixed income and 10 percent to real assets (real estate, energy, and timber). The actual allocations to these asset classes may vary tactically around the long-term policy allocations based on relative market valuations. CONTRIBUTIONS AND FUTURE BENEFIT PAYMENTS We do not expect to make any contributions to our defined benefit plans in fiscal Actual 2008 contributions could exceed our current projections, as influenced by our decision to undertake discretionary funding of our benefit trusts versus other competing investment priorities and future changes in government requirements. We expect to pay $24 million of benefits from our unfunded postemployment benefit plans in fiscal Estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: Defined Benefit Pension Plans Other Postretirement Benefit Plans Gross Medicare Subsidy Receipts Postemployment Benefit Plans In Millions, Fiscal Year 2008 $ 169 $ 55 $ 6 $ , DEFINED CONTRIBUTION PLANS The General Mills SavingsPlanisadefinedcontributionplanthatcoverssalaried and nonunion employees. It had net assets of $2,303 million as of May 27, 2007, and $2,031 million as of May 28, This plan is a 401(k) savings plan that includes a number of investment funds and an Employee Stock Ownership Plan (ESOP). We sponsor another savings plan for certain hourly employees with net assets of $15 million as of May 27, Our total recognized expense related to defined contribution plans was $48 million in fiscal 2007, $46 million in fiscal 2006, and $17 million in fiscal The ESOP s only assets are our common stock and temporary cash balances. The ESOP s share of the total defined contribution expense was $40 million in fiscal 2007, $38 million in fiscal 2006, and $11 million in fiscal The ESOP s expense is calculated by the shares allocated method. The ESOP uses our common stock to convey benefits to employees and, through increased stock ownership, to further align employee interests with those of stockholders. We match a percentage of employee contributions to the General Mills Savings Plan with a base match plus a variable year end match that depends on annual results. Employees receive our match in the form of common stock. The ESOP originally purchased our common stock principally with funds borrowed from third parties and guaranteed by us. The ESOP shares are included in net shares outstanding for the purposes of calculating earnings per share. The ESOP s third-party debt is described in Note 8. We treat cash dividends paid to the ESOP the same as other dividends. Dividends received on leveraged shares (i.e., all shares originally purchased with the debt proceeds) may be used for debt service or reinvested in more shares, while dividends received on unleveraged shares are passed through to participants or reinvested in more shares. Our cash contribution to the ESOP is calculated so as to pay off enough debt to release sufficient shares to make our

82 80 match. The ESOP uses our cash contributions to the plan, plus the dividends received on the ESOP s leveraged shares, to make principal and interest payments on the ESOP s debt. As loan payments are made, shares become unencumbered by debt and are committed to be allocated. The ESOP allocates shares to individual employee accounts on the basis of the match of employee payroll savings (contributions), plus reinvested dividends received on previously allocated shares. The ESOP incurred interest expense of less than $1 million in each of fiscal 2007, 2006, and The ESOP used dividends of $3 million in fiscal 2007, $4 million in 2006, and $4 million in 2005, along with our contributions of less than $1 million in each of fiscal 2007, 2006, and 2005 to make interest and principal payments. The number of shares of our common stock in the ESOP is as follows: In Thousands, Fiscal Year Ended May 27, 2007 May 28, 2006 Unreleased shares 150 Allocated to participants 5,405 5,187 Total shares 5,405 5,337 EXECUTIVE INCENTIVE PLAN Our EIP provides incentives to key employees who have the greatest potential to contribute to current earnings and successful future operations. All employees at the level of vice president and above participate in the plan. These awards are approved by the Compensation Committee of the Board of Directors, which consists solely of independent, outside directors. Awards are based on performance against pre-established goals approved by the Compensation Committee. Profit-sharing expense was $30 million in fiscal 2007, $23 million in fiscal 2006, and $17 million in fiscal NOTE 14 Income Taxes The components of earnings before income taxes and after-tax earnings from joint ventures and the corresponding income taxes thereon are as follows: In Millions, Fiscal Year Earnings before income taxes and after-tax earnings from joint ventures: United States $1,453 $1,372 $1,715 Foreign Total earnings before income taxes and after-tax earnings from joint ventures $1,631 $1,559 $1,807 Income taxes: Currently payable: Federal $ 448 $ 392 $ 554 State and local Foreign Total current Deferred: Federal State and local 9 (4) (3) Foreign (11) (8) (2) Total deferred Total income taxes $ 560 $ 538 $ 661 The following table reconciles the United States statutory income tax rate with our effective income tax rate: Fiscal Year United States statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefits Divestitures, net 1.8 Foreign rate differences (2.7) (.9).2 Other, net (0.6) (2.2) (2.4) Effective income tax rate 34.3% 34.5% 36.6%

83 81 The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: May 27, 2007 May 28, 2006 In Millions Accrued liabilities $ 233 $ 189 Restructuring, impairment and other exit charges 4 8 Compensation and employee benefits Unrealized hedge losses Unrealized losses Tax credit carry forwards 51 Other Gross deferred tax assets 1,391 1,480 Valuation allowance Net deferred tax assets Brands 1,277 1,292 Depreciation Prepaid pension asset Intangible assets Tax lease transactions Zero coupon convertible debentures 18 Other Gross deferred tax liabilities 2,145 2,262 Net deferred tax liability $1,366 $1,640 Of the total valuation allowance of $612 million, $523 million relates to a deferred tax asset for losses recorded as part of the Pillsbury acquisition. In the future, when tax benefits related to these losses are finalized, the reduction in the valuation allowance will be allocated to reduce goodwill. The change in the valuation allowance was entirely offset by an equal adjustment to the underlying deferred tax asset. Of the remaining valuation allowance, $73 million relates to state and foreign operating loss carry forwards. In the future, if tax benefits are realized related to the operating losses, the reduction in the valuation allowance will reduce tax expense. As of May 27, 2007, we believe it is more likely than not that the remainder of our deferred tax asset is realizable. The adoption of SFAS 158 resulted in a $248 million decrease in the net deferred tax liabilities, as described in Note 2 on pages 58 to 62. The carry forward periods on the net tax benefited amounts of our foreign loss carry forwards are as follows: $24 million do not expire; $4 million expire in fiscal 2008; $23 million expire between fiscal 2009 and fiscal 2014; and $17 million expire in fiscal We have not recognized a deferred tax liability for unremitted earnings of $1.5 billion from our foreign operations because we do not expect those earnings to become taxable to us in the foreseeable future. Annually, we file more than 350 income tax returns in approximately 100 global taxing jurisdictions. Our consolidated effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we operate. Management judgment is involved in determining our effective tax rate and in evaluating the ultimate resolution of any uncertain tax positions. We are periodically under examination or engaged in a tax controversy. We establish reserves in a variety of taxing jurisdictions when, despite our belief that our tax return positions are supportable, we believe that certain positions may be challenged and may need to be revised. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our effective income tax rate includes the impact of reserve provisions and changes to those reserves. We also provide interest on these reserves at the appropriate statutory interest rate. These interest charges are also included in our effective tax rate. As of May 27, 2007, our income tax and related interest reserves recorded in other current liabilities were slightly more than $700 million. The Internal Revenue Service (IRS) recently concluded field examinations for our 2002 and 2003 federal tax years. These examinations included review of our determinations of cost basis, capital losses, and the depreciation of tangible assets and amortization of intangible assets arising from our acquisition of Pillsbury and the sale of minority interests in our GMC subsidiary. The IRS has proposed adjustments related to a majority of the tax benefits associated with these items. We believe we have meritorious defenses and intend to vigorously defend our positions. Our potential liability for this matter is significant and, notwithstanding our reserves against this potential liability, an unfavorable resolution could have a material adverse impact on our results of operations or cash flows from operations. The IRS is currently auditing our income tax returns for the 2004 to 2006 federal tax years. In addition, certain other tax deficiency issues and refund claims for previous years in several jurisdictions remain unresolved. NOTE 15 Leases and Other Commitments An analysis of rent expense by property for operating leases follows: In Millions, Fiscal Year Warehouse space $ 46 $ 44 $ 41 Equipment Other Total rent expense $107 $106 $108 Some operating leases require payment of property taxes, insurance, and maintenance costs in addition to the rent payments. Contingent and escalation rent in excess of

84 82 minimum rent payments and sublease income netted in rent expense were insignificant. Noncancelable future lease commitments are: In Millions Operating Leases Capital Leases 2008 $ 74 $ After Total noncancelable future lease commitments $ Less: interest (5) Present value of obligations under capital leases $23 These future lease commitments will be partially offset by estimated future sublease receipts of $44 million. Depreciation on capital leases is recorded as depreciation expense in our results of operations. We are contingently liable under guarantees and comfort letters for $606 million for the debt and other obligations of consolidated subsidiaries. We also are contingently liable under guarantees and comfort letters of $266 million for the debt and other obligations of non-consolidated affiliates, primarily CPW. We are involved in various claims, including environmental matters, arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters, either individually or in aggregate, will not have a material adverse effect on our financial position or results of operations. NOTE 16 Business Segment and Geographic Information We operate in the consumer foods industry. We have three operating segments by type of customer and geographic region as follows: U.S. Retail, 68 percent of our fiscal 2007 consolidated net sales; International, 17 percent of our fiscal 2007 consolidated net sales; and Bakeries and Foodservice, 15 percent of our fiscal 2007 consolidated net sales. Our U.S. Retail segment reflects business with a wide variety of grocery stores, mass merchandisers, membership stores, natural food chains and drug, dollar and discount chains operating throughout the United States. Our major product categories in the United States are ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup, dry dinners, shelf stable and frozen vegetables, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, microwave popcorn, and a wide variety of organic products including soup, granola bars, and cereal. Our International segment is made up of retail businesses outside of the United States. In Canada, our major product categories are ready-to-eat cereals, shelf stable and frozen vegetables, dry dinners, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza snacks, and grain, fruit and savory snacks. In markets outside the United States and Canada, our product categories include superpremium ice cream, granola and grain snacks, shelf stable and frozen vegetables, dough products, and dry dinners. Our International segment also includes products manufactured in the United States for export internationally, primarily in Caribbean and Latin American markets, as well as products we manufacture for sale to our joint ventures internationally. These international businesses are managed through 34 sales and marketing offices. Revenues from export activities are reported in the region or country where the end customer is located. In our Bakeries and Foodservice segment, we sell branded cereals, snacks, dinner and side dish products, refrigerated and soft-serve frozen yogurt, frozen dough products, branded baking mixes, and custom food items. Our customers include foodservice distributors and operators, convenience stores, vending machine operators, quick service chains and other restaurants, and business and school cafeterias in the United States and Canada. In addition, mixes and unbaked and fully baked frozen dough products are marketed throughout the United States and Canada to retail, supermarket, and wholesale bakeries. Operating profit for the operating segments excludes unallocated corporate expenses (variances to planned corporate overhead expenses, variances to planned domestic employee benefits and incentives, all stock compensation costs, annual contributions to the General Mills Foundation, and other items that are not part of our measurement of segment operating performance), and restructuring, impairment and other exit costs because these items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by executive management. Under our supply chain organization, our manufacturing, warehouse, and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. As a result, fixed assets, capital expenditures for long-lived assets, and depreciation and amortization expenses are neither maintained nor available by operating segment.

85 83 In Millions, Fiscal Year Net sales: U.S. Retail $ 8,491 $ 8,137 $ 7,891 International 2,124 1,837 1,725 Bakeries and Foodservice 1,827 1,738 1,692 Total net sales $12,442 $11,712 $11,308 Segment operating profit: U.S. Retail $ 1,896 $ 1,801 $ 1,745 International Bakeries and Foodservice Total segment operating profit 2,260 2,111 2,016 Unallocated corporate expenses (163) (123) (32) Restructuring, impairment and other exit costs (39) (30) (84) Operating profit $ 2,058 $ 1,958 $ 1,900 The following table provides financial information by geographic area: In Millions, Fiscal Year Net sales: United States $10,258 $ 9,811 $ 9,511 Non-United States 2,184 1,901 1,797 Total $12,442 $11,712 $11,308 May 27, 2007 May 28, 2006 In Millions Land, buildings and equipment: United States $2,576 $2,584 Non-United States Total $3,014 $2,997 NOTE 17 Supplemental Information The components of certain Consolidated Balance Sheet accounts are as follows: May 27, 2007 May 28, 2006 In Millions Receivables: From customers $969 $930 Less allowance for doubtful accounts (16) (18) Total $953 $912 May 27, 2007 May 28, 2006 In Millions Inventories: At the lower of cost, determined on the FIFO or weighted-average cost methods, or market: Raw materials and packaging $ 242 $ 226 Finished goods Grain Excess of FIFO or weighted-average cost over LIFO cost (78) (62) Total $1,174 $1,055 Inventories of $806 million as of May 27, 2007, and $739 million as of May 28, 2006, were valued at LIFO. May 27, 2007 May 28, 2006 In Millions Prepaid expenses and other current assets: Prepaid expenses $172 $168 Accrued interest receivable, including interest rate swaps Miscellaneous Total $443 $377

86 84 May 27, 2007 May 28, 2006 In Millions Land, buildings and equipment: Land $ 61 $ 54 Buildings 1,518 1,430 Equipment 3,992 3,859 Assets under capital lease 24 Capitalized software Construction in progress Total land, buildings and equipment 6,096 5,806 Less accumulated depreciation (3,082) (2,809) Total $ 3,014 $ 2,997 Other assets: Pension assets $ 1,019 $ 1,323 Marketable securities, at market Investments in and advances to joint ventures Miscellaneous Total $ 1,587 $ 1,778 Other current liabilities: Accrued payroll $ 356 $ 351 Accrued interest Accrued trade and consumer promotions Accrued taxes Miscellaneous Total $ 2,079 $ 1,831 Other noncurrent liabilities: Interest rate swaps $ 152 $ 196 Accrued compensation and benefits, including payables for underfunded other postretirement and postemployment benefit plans Miscellaneous Total $ 1,230 $ 924 Certain Consolidated Statements of Earnings amounts are as follows: In Millions, Fiscal Year Depreciation $421 $424 $443 Research and development Media and advertising (including production and communication costs) The components of interest, net are as follows: In Millions, Fiscal Year Interest expense $397 $367 $449 Distributions paid on preferred stock and interests in subsidiaries Capitalized interest (3) (1) (3) Interest income (31) (27) (30) Interest, net $427 $399 $455 Certain Consolidated Statements of Cash Flows amounts are as follows: In Millions, Fiscal Year Cash interest payments $407 $378 $450 Cash paid for income taxes

87 85 NOTE 18 Quarterly Data (Unaudited) Summarized quarterly data for fiscal 2007 and 2006 follows: In Millions, Except per Share and Market Price Amounts First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Quarter Ended Net sales $2,860 $2,679 $3,467 $3,293 $3,054 $2,877 $3,061 $2,863 Gross margin 1, ,279 1,203 1, , Net earnings (a) 222 Net earnings per share: Basic $.76 $.69 $ 1.12 $ 1.04 $.77 $.69 $.65 $.62 Diluted $.74 $.64 $ 1.08 $.97 $.74 $.68 $.62 $.61 Dividends per share $.35 $.33 $.35 $.33 $.37 $.34 $.37 $.34 Market price of common stock: High $54.21 $51.45 $57.25 $49.38 $59.23 $50.49 $61.11 $52.16 Low $49.27 $45.49 $51.50 $44.67 $55.51 $47.05 $54.57 $48.51 (a) Includes pretax impairment charge of $37 million for certain underperforming product lines in our Bakeries and Foodservice segment.

88 86 Glossary Average total capital. Notes payable, long-term debt including current portion, minority interests, and stockholders equity, excluding accumulated other comprehensive income (loss). The average is calculated using the average of the beginning of fiscal year and end of fiscal year Consolidated Balance Sheet amounts for these line items. Core working capital. Accounts receivable plus inventories less accounts payable, all as of the last day of our fiscal year. Derivatives. Financial instruments that we use to manage our risk arising from changes in commodity prices, interest rates, foreign exchange rates, and stock prices. Equivalent case. A unit of measure used to express quantities of material in standardized sales terms across our divisions. Generally Accepted Accounting Principles (GAAP). Guidelines, procedures, and practices that we are required to use in recording and reporting accounting information in our audited financial statements. Goodwill. The difference between the purchase price of acquired companies and the related fair values of net assets acquired. Gross margin. Net sales less cost of sales. Reporting unit. An operating segment or a business one level below an operating segment. Return on average total capital. Net earnings, excluding after-tax interest expense, divided by average total capital. Segment operating profit margin. profit divided by net sales. Segment operating Total debt. Notes payable and long-term debt, including current portion. Transaction gains and losses. The impact on our Consolidated Financial Statements of exchange rate changes arising from specific transactions. Translation adjustments. The impact of the conversion of our foreign affiliates financial statements to U.S. dollars for the purpose of consolidating our financial statements. Unit volume growth. The year-over-year growth in equivalent case volume sold to our customers. Variable interest entities (VIEs). A legal structure that is used for business purposes that either (1) does not have equity investors that have voting rights and share in all the entity s profits and losses or (2) has equity investors that do not provide sufficient financial resources to support the entity s activities. Hedge accounting. Special accounting for qualifying hedges allows changes in a hedging instrument s fair value to offset corresponding changes in the hedged item in the same reporting period. Hedge accounting is only permitted for certain hedging instruments and hedged items, only if the hedging relationship is highly effective, and only prospectively from the date a hedging relationship is formally documented. LIBOR. London Interbank Offered Rate Minority interests. Preferred stock and interests of subsidiaries held by third parties. Net price realization. The impact of list and promoted price increases, net of trade and other promotion costs. Notional principal amount. The principal amount on which fixed- or floating-rate interest payments are calculated. Operating cash flow to debt ratio. Net cash provided by operating activities, divided by the sum of notes payable and long-term debt, including current portion. Product rationalization. The elimination of low margin or low demand products in order to direct resources to higher margin or higher demand products.

89 87 Total Return to Stockholders These line graphs and tables compare the cumulative total stockholder return for holders of our common stock with the cumulative total return of the Standard & Poor s 500 Stock Index and the Standard & Poor s 500 Packaged Foods Index for the last five-year and ten-year fiscal periods. The graphs and tables assume the investment of $100 in each of General Mills common stock and the specified indexes as the beginning of the applicable period, and assume the reinvestment of all dividends. On July 13, 2007, there were approximately 33,259 record holders of our common stock. TOTAL RETURN TO STOCKHOLDERS 5Years TOTAL RETURN TO STOCKHOLDERS 10 Years

90

91 Shareholder Information world headquarters Number One General Mills Boulevard Minneapolis, MN Phone: (763) web site markets New York Stock Exchange Trading Symbol: GIS independent auditor kpmg llp 4200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN Phone: (612) investor inquiries General Shareholder Information: Investor Relations Department (800) or (763) Analysts/Investors: Kristen S. Wenker Vice President, Investor Relations (763) transfer agent and registrar Our transfer agent can assist you with a variety of services, including change of address or questions about dividend checks. Wells Fargo Bank, N.A. 161 North Concord Exchange P.O. Box St. Paul, MN Phone: (800) or (651) shareownerservices notice of annual meeting The annual meeting of shareholders will be held at 11 a.m., Central Daylight Time, Sept. 24, 2007, at the Children s Theatre Company, 2400 Third Avenue South, Minneapolis, MN electronic access to proxy statement, annual report and form 10-k Shareholders who have access to the Internet are encouraged to enroll in the electronic delivery program. Please go to the Web site and follow the instructions to enroll. If your General Mills shares are not registered in your name, contact your bank or broker to enroll in this program. certifications Our CEO and CFO Certifications required under Sarbanes-Oxley Section 302 were filed as exhibits to our Form 10-K. We also have submitted the required annual CEO certification to the New York Stock Exchange. this report is printed on recycled paper Cover contains 10% post-consumer waste. Holiday Gift Boxes Design by Addison Printing by Litho of Minnesota 2007 General Mills, Inc. General Mills Gift Boxes are a part of many shareholders December holiday traditions. To request an order form, call us toll free at (866) or write, including your name, street address, city, state, zip code and phone number (including area code) to: 2007 General Mills Holiday Gift Box Department 5025 P.O. Box 5007 Stacy, MN Or you can place an order online at Please contact us after Oct.1, 2007.

92 number one general mills boulevard minneapolis, mn